Is Genesis Resources (ASX:GES) Using Too Much Debt?

Simply Wall St · 03/12 20:39

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.' 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 Genesis Resources Limited (ASX:GES) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Genesis Resources

How Much Debt Does Genesis Resources Carry?

As you can see below, at the end of December 2024, Genesis Resources had AU$13.8m of debt, up from AU$12.3m a year ago. Click the image for more detail. Net debt is about the same, since the it doesn't have much cash.

debt-equity-history-analysis
ASX:GES Debt to Equity History March 12th 2025

How Healthy Is Genesis Resources' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Genesis Resources had liabilities of AU$19.7m due within 12 months and no liabilities due beyond that. Offsetting this, it had AU$64.4k in cash and AU$88.3k in receivables that were due within 12 months. So its liabilities total AU$19.6m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the AU$8.61m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Genesis Resources would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is Genesis Resources's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Given its lack of meaningful operating revenue, investors are probably hoping that Genesis Resources finds some valuable resources, before it runs out of money.

Caveat Emptor

Over the last twelve months Genesis Resources produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping AU$923k. 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. Not least because it had negative free cash flow of AU$1.6m over the last twelve months. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 5 warning signs with Genesis Resources , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.