Does Genesis Resources (ASX:GES) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Genesis Resources Limited (ASX:GES) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Genesis Resources

How Much Debt Does Genesis Resources Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Genesis Resources had AU$7.47m of debt, an increase on AU$6.40m, over one year. And it doesn't have much cash, so its net debt is about the same.

A Look At Genesis Resources' Liabilities

According to the last reported balance sheet, Genesis Resources had liabilities of AU$9.90m due within 12 months, and liabilities of AU$6.0k due beyond 12 months. Offsetting these obligations, it had cash of AU$70.0k as well as receivables valued at AU$12.6k due within 12 months. So it has liabilities totalling AU$9.83m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of AU$10.2m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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$1.1m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through AU$1.1m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Genesis Resources (at least 3 which are potentially serious) , 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.

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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. 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.
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