Is GSE Systems (NASDAQ:GVP) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, GSE Systems, Inc. (NASDAQ:GVP) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for GSE Systems

What Is GSE Systems's Net Debt?

You can click the graphic below for the historical numbers, but it shows that GSE Systems had US$2.39m of debt in September 2023, down from US$3.94m, one year before. However, it does have US$2.04m in cash offsetting this, leading to net debt of about US$346.0k.

How Healthy Is GSE Systems' Balance Sheet?

According to the last reported balance sheet, GSE Systems had liabilities of US$16.0m due within 12 months, and liabilities of US$1.43m due beyond 12 months. Offsetting these obligations, it had cash of US$2.04m as well as receivables valued at US$10.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$4.73m.

This deficit is considerable relative to its market capitalization of US$7.74m, so it does suggest shareholders should keep an eye on GSE Systems' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine GSE Systems's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, GSE Systems made a loss at the EBIT level, and saw its revenue drop to US$46m, which is a fall of 10%. That's not what we would hope to see.

Caveat Emptor

Not only did GSE Systems's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable US$5.5m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$2.3m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 5 warning signs for GSE Systems (3 can't be ignored) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.