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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. 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. Importantly, Global Fashion Group S.A. (ETR:GFG) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Global Fashion Group
What Is Global Fashion Group's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Global Fashion Group had €700.0k of debt in June 2019, down from €6.60m, one year before. However, it does have €70.3m in cash offsetting this, leading to net cash of €69.6m.
How Strong Is Global Fashion Group's Balance Sheet?
We can see from the most recent balance sheet that Global Fashion Group had liabilities of €360.5m falling due within a year, and liabilities of €96.3m due beyond that. On the other hand, it had cash of €70.3m and €63.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €323.3m.
This is a mountain of leverage relative to its market capitalization of €403.8m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Global Fashion Group 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 it is future earnings, more than anything, that will determine Global Fashion Group'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.