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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.’ So it seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. We note that Gogo Inc. (NASDAQ:GOGO) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company’s use of debt, we first look at cash and debt together.
What Is Gogo’s Debt?
As you can see below, Gogo had US$1.03b of debt, at March 2019, which is about the same the year before. You can click the chart for greater detail. However, because it has a cash reserve of US$188.7m, its net debt is less, at about US$842.4m.
How Healthy Is Gogo’s Balance Sheet?
According to the last reported balance sheet, Gogo had liabilities of US$271.3m due within 12 months, and liabilities of US$1.31b due beyond 12 months. Offsetting this, it had US$188.7m in cash and US$134.6m in receivables that were due within 12 months. So its liabilities total US$1.26b more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the US$389.8m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Gogo would likely require a major re-capitalisation if it had to pay its creditors today. Because it carries more debt than cash, we think it’s worth watching Gogo’s balance sheet over time. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Gogo’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, Gogo reported revenue of US$861m, which is a gain of 13%. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Importantly, Gogo had negative earnings before interest and tax (EBIT), over the last year. To be specific the EBIT loss came in at US$13m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through US$139m in the last year. So we consider this a high risk stock and we wouldn’t be at all surprised if the company asks shareholders for money before long. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Gogo insider transactions.
At the end of the day, it’s often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It’s free.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.