David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We note that GO internet SpA (BIT:GO) has debt on its balance sheet. But does this debt worry shareholders?
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for GO internet
What is GO Internet’s debt?
As you can see below, at the end of June 2022, GO Internet had a debt of 9.03 million euros, compared to 7.95 million euros a year ago. Click on the image for more details. However, he also had €742.0k in cash, and his net debt is therefore €8.29 million.
How strong is GO Internet’s balance sheet?
The latest balance sheet data shows that GO Internet had liabilities of €9.51 million due within one year, and liabilities of €6.63 million falling due thereafter. In return, it had €742.0k in cash and €5.26m in receivables due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables by €10.1 million.
The deficiency here weighs heavily on the company itself of 5.39 million euros, like a child struggling under the weight of a huge backpack full of books, his sports equipment and a trumpet. So we definitely think shareholders need to watch this one closely. Ultimately, GO Internet would likely need a major recapitalization if its creditors were to demand repayment. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in total isolation; since GO Internet will need revenue to repay this debt. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
Last year, GO Internet was not profitable in terms of EBIT, but managed to increase its turnover by 46% to 11 million euros. With a little luck, the company will be able to progress towards profitability.
Despite the revenue growth, GO Internet still posted a loss in earnings before interest and taxes (EBIT) over the past year. Its EBIT loss was €2.1 million. Considering that, along with the liabilities mentioned above, we are nervous about the business. It would have to quickly improve its functioning so that we are interested in it. In particular because it recorded a negative free cash flow of €509,000 over the last twelve months. That means it’s on the risky side of things. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Example: we have identified 3 warning signs for GO Internet you should be aware, and 2 of them are concerning.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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