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Health Check: How Prudently Does Grande West Transportation Group (CVE:BUS) Use Debt?

Simply Wall St

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. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Grande West Transportation Group Inc (CVE:BUS) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Grande West Transportation Group

What Is Grande West Transportation Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Grande West Transportation Group had CA$3.11m of debt in June 2019, down from CA$6.97m, one year before. However, it does have CA$4.42m in cash offsetting this, leading to net cash of CA$1.31m.

TSXV:BUS Historical Debt, October 7th 2019
TSXV:BUS Historical Debt, October 7th 2019

A Look At Grande West Transportation Group's Liabilities

We can see from the most recent balance sheet that Grande West Transportation Group had liabilities of CA$12.6m falling due within a year, and liabilities of CA$2.67m due beyond that. On the other hand, it had cash of CA$4.42m and CA$9.95m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$920.0k.

Of course, Grande West Transportation Group has a market capitalization of CA$33.1m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Grande West Transportation 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 Grande West Transportation 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.

In the last year Grande West Transportation Group had negative earnings before interest and tax, and actually shrunk its revenue by 54%, to CA$40m. To be frank that doesn't bode well.

So How Risky Is Grande West Transportation Group?

While Grande West Transportation Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CA$800k. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. For riskier companies like Grande West Transportation Group 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.