Is CGG (EPA:CGG) using too much debt?

Warren Buffett said: “Volatility is far from synonymous with risk. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We notice that CGG (EPA:CGG) has debt on its balance sheet. But should shareholders worry about its use of debt?

Why is debt risky?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.

See our latest analysis for CGG

What is CGG’s debt?

As you can see below, CGG had $1.23 billion in debt as of September 2021, up from $1.37 billion the previous year. On the other hand, he has $241.4 million in cash, resulting in a net debt of around $984.9 million.

A look at CGG’s liabilities

Looking at the latest balance sheet data, we can see that CGG had liabilities of $724.9 million due within 12 months and liabilities of $1.40 billion due beyond. In return, he had $241.4 million in cash and $350.9 million in receivables due within 12 months. Thus, its liabilities total $1.53 billion more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the $661.2 million enterprise, like a colossus towering above mere mortals. We would therefore be watching his balance sheet closely, no doubt. After all, CGG would likely need a significant recapitalization if it were to pay its creditors today. There is no doubt that we learn the most about debt from the balance sheet. But it is ultimately the future profitability of the activity that will decide whether CGG will be able to strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Last year, CGG posted a loss before interest and taxes and actually cut its revenue by 26%, to $808 million. It makes us nervous, to say the least.

Caveat Emptor

While CGG’s declining revenue is about as comforting as a wet blanket, arguably its loss of earnings before interest and taxes (EBIT) is even less appealing. Indeed, it lost $2.2 million in EBIT. When we look at this alongside significant liabilities, we are not particularly confident in the business. It would have to quickly improve its functioning so that we are interested in it. Not least because he burned $6.6 million in negative free cash flow over the past year. So suffice it to say that we consider the stock to be risky. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. We have identified 1 warning sign with CGG, and understanding them should be part of your investment process.

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

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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.