Is Genesis Resources (ASX:GES) A Risky Investment?

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. As with many other companies Genesis Resources Limited (ASX:GES) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Genesis Resources

What Is Genesis Resources's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Genesis Resources had debt of AU$12.3m, up from AU$10.3m in one year. Net debt is about the same, since the it doesn't have much cash.

A Look At Genesis Resources' Liabilities

Zooming in on the latest balance sheet data, we can see that Genesis Resources had liabilities of AU$17.1m due within 12 months and no liabilities due beyond that. On the other hand, it had cash of AU$56.5k and AU$103.1k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$17.0m.

This deficit casts a shadow over the AU$4.70m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Genesis Resources would probably need a major re-capitalization if its creditors were to demand repayment. 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 Genesis Resources 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.

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

Importantly, Genesis Resources had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable AU$1.2m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through AU$2.1m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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. For instance, we've identified 5 warning signs for Genesis Resources that you should be aware of.

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.

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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.