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.’ It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, GP Strategies Corporation (NYSE:GPX) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for GP Strategies
What Is GP Strategies’s Net Debt?
As you can see below, GP Strategies had US$12.7m of debt at December 2020, down from US$86.6m a year prior. But it also has US$23.1m in cash to offset that, meaning it has US$10.3m net cash.
A Look At GP Strategies’ Liabilities
The latest balance sheet data shows that GP Strategies had liabilities of US$119.5m due within a year, and liabilities of US$39.0m falling due after that. Offsetting these obligations, it had cash of US$23.1m as well as receivables valued at US$138.7m due within 12 months. So it can boast US$3.32m more liquid assets than total liabilities.
Having regard to GP Strategies’ size, it seems that its liquid assets are well balanced with its total liabilities. So while it’s hard to imagine that the US$282.8m company is struggling for cash, we still think it’s worth monitoring its balance sheet. Succinctly put, GP Strategies boasts net cash, so it’s fair to say it does not have a heavy debt load!
Shareholders should be aware that GP Strategies’s EBIT was down 21% 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 GP Strategies’s ability to maintain a healthy balance sheet going forward. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. GP Strategies may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, GP Strategies actually produced more free cash flow than EBIT over the last three years. There’s nothing better than incoming cash when it comes to staying in your lenders’ good graces.
While it is always sensible to investigate a company’s debt, in this case GP Strategies has US$10.3m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$57m, being 126% of its EBIT. So we are not troubled with GP Strategies’s debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet – far from it. For example, we’ve discovered 3 warning signs for GP Strategies that you should be aware of before investing here.
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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