Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that GBLT Corp. (CVE:GBLT) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does GBLT Carry?
As you can see below, GBLT had €1.76m of debt, at March 2019, which is about the same the year before. You can click the chart for greater detail. However, it does have €67.1k in cash offsetting this, leading to net debt of about €1.70m.
A Look At GBLT's Liabilities
We can see from the most recent balance sheet that GBLT had liabilities of €4.34m falling due within a year, and liabilities of €369.9k due beyond that. On the other hand, it had cash of €67.1k and €2.12m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €2.52m.
While this might seem like a lot, it is not so bad since GBLT has a market capitalization of €4.60m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is GBLT'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 GBLT managed to grow its revenue by 16%, to €21m. We usually like to see faster growth from unprofitable companies, but each to their own.
Importantly, GBLT had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost a very considerable €825k 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled €411k in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. For riskier companies like GBLT I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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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