Is Gumtree Australia Markets (ASX:GUM) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Gumtree Australia Markets Limited (ASX:GUM) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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.

How Much Debt Does Gumtree Australia Markets Carry?

The image below, which you can click on for greater detail, shows that Gumtree Australia Markets had debt of AU$37.8m at the end of December 2024, a reduction from AU$41.7m over a year. However, it does have AU$5.46m in cash offsetting this, leading to net debt of about AU$32.3m.

A Look At Gumtree Australia Markets' Liabilities

We can see from the most recent balance sheet that Gumtree Australia Markets had liabilities of AU$30.8m falling due within a year, and liabilities of AU$49.6m due beyond that. Offsetting these obligations, it had cash of AU$5.46m as well as receivables valued at AU$9.11m due within 12 months. So it has liabilities totalling AU$65.8m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the AU$33.7m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Gumtree Australia Markets would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Gumtree Australia Markets will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Check out our latest analysis for Gumtree Australia Markets

Over 12 months, Gumtree Australia Markets made a loss at the EBIT level, and saw its revenue drop to AU$87m, which is a fall of 9.6%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Gumtree Australia Markets produced an earnings before interest and tax (EBIT) loss. Indeed, it lost AU$85k at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of AU$6.9m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Gumtree Australia Markets (at least 3 which are significant) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.