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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Gigaset AG (ETR:GGS) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Gigaset
What Is Gigaset's Net Debt?
As you can see below, at the end of March 2019, Gigaset had €13.5m of debt, up from none a year ago. Click the image for more detail. But it also has €25.8m in cash to offset that, meaning it has €12.3m net cash.
How Healthy Is Gigaset's Balance Sheet?
We can see from the most recent balance sheet that Gigaset had liabilities of €82.1m falling due within a year, and liabilities of €102.6m due beyond that. Offsetting these obligations, it had cash of €25.8m as well as receivables valued at €33.7m due within 12 months. So it has liabilities totalling €125.1m more than its cash and near-term receivables, combined.
This deficit casts a shadow over the €47.7m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Gigaset would likely require a major re-capitalisation if it had to pay its creditors today. Given that Gigaset has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.
Shareholders should be aware that Gigaset's EBIT was down 67% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Gigaset's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.