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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Genimous Technology Co., Ltd. (SZSE:000676) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Genimous Technology
The image below, which you can click on for greater detail, shows that Genimous Technology had debt of CN¥170.2m at the end of June 2024, a reduction from CN¥245.2m over a year. But on the other hand it also has CN¥1.55b in cash, leading to a CN¥1.38b net cash position.
Zooming in on the latest balance sheet data, we can see that Genimous Technology had liabilities of CN¥596.8m due within 12 months and liabilities of CN¥26.2m due beyond that. Offsetting this, it had CN¥1.55b in cash and CN¥1.07b in receivables that were due within 12 months. So it actually has CN¥1.99b more liquid assets than total liabilities.
It's good to see that Genimous Technology has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Genimous Technology boasts net cash, so it's fair to say it does not have a heavy debt load!
And we also note warmly that Genimous Technology grew its EBIT by 10% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Genimous Technology 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Genimous Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Genimous Technology actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
While it is always sensible to investigate a company's debt, in this case Genimous Technology has CN¥1.38b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥259m, being 423% of its EBIT. So is Genimous Technology's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Genimous Technology, you may well want to click here to check an interactive graph of its earnings per share history.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.