Yahoo Finance Is GSTechnologies (LON:GST) A Risky Investment?
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 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 can see that GSTechnologies Ltd. (LON:GST) does use debt in its business. But the more important question is: how much risk is that debt creating?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
View our latest analysis for GSTechnologies
How Much Debt Does GSTechnologies Carry?
As you can see below, at the end of September 2020, GSTechnologies had US$1.73m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has US$1.79m in cash, leading to a US$64.0k net cash position.
How Strong Is GSTechnologies' Balance Sheet?
We can see from the most recent balance sheet that GSTechnologies had liabilities of US$748.0k falling due within a year, and liabilities of US$1.84m due beyond that. On the other hand, it had cash of US$1.79m and US$1.48m worth of receivables due within a year. So it can boast US$679.0k more liquid assets than total liabilities.
This short term liquidity is a sign that GSTechnologies could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that GSTechnologies has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is GSTechnologies's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year GSTechnologies had a loss before interest and tax, and actually shrunk its revenue by 57%, to US$3.0m. That makes us nervous, to say the least.
So How Risky Is GSTechnologies?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year GSTechnologies had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$263k and booked a US$182k accounting loss. Given it only has net cash of US$64.0k, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that GSTechnologies is showing 4 warning signs in our investment analysis , and 2 of those are concerning...
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.
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. 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.
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