Yahoo Finance Is GSTechnologies (LON:GST) Weighed On By Its Debt Load?
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 GSTechnologies Ltd. (LON:GST) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for GSTechnologies
What Is GSTechnologies's Debt?
As you can see below, at the end of March 2021, GSTechnologies had US$1.54m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds US$1.74m in cash, so it actually has US$204.0k net cash.
A Look At GSTechnologies' Liabilities
We can see from the most recent balance sheet that GSTechnologies had liabilities of US$1.58m falling due within a year, and liabilities of US$1.21m due beyond that. On the other hand, it had cash of US$1.74m and US$2.08m worth of receivables due within a year. So it can boast US$1.03m 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. Succinctly put, GSTechnologies boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since GSTechnologies will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, GSTechnologies made a loss at the EBIT level, and saw its revenue drop to US$3.4m, which is a fall of 25%. That makes us nervous, to say the least.
So How Risky Is GSTechnologies?
By their very nature companies that are losing money are more risky than those with a long history of profitability. 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$1.1m and booked a US$490k accounting loss. With only US$204.0k on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Case in point: We've spotted 4 warning signs for GSTechnologies you should be aware of, and 1 of them is significant.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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