These 4 Measures Indicate That Genesis Land Development (TSE:GDC) Is Using Debt Reasonably Well

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Genesis Land Development Corp. (TSE:GDC) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Genesis Land Development

What Is Genesis Land Development's Debt?

The image below, which you can click on for greater detail, shows that Genesis Land Development had debt of CA$23.8m at the end of March 2021, a reduction from CA$49.2m over a year. But it also has CA$24.9m in cash to offset that, meaning it has CA$1.05m net cash.

A Look At Genesis Land Development's Liabilities

The latest balance sheet data shows that Genesis Land Development had liabilities of CA$27.3m due within a year, and liabilities of CA$38.1m falling due after that. On the other hand, it had cash of CA$24.9m and CA$16.1m worth of receivables due within a year. So its liabilities total CA$24.4m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Genesis Land Development is worth CA$115.5m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Genesis Land Development boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Genesis Land Development made a loss at the EBIT level, last year, it was also good to see that it generated CA$13m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Genesis Land Development'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Genesis Land Development may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Genesis Land Development actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

Although Genesis Land Development's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CA$1.05m. And it impressed us with free cash flow of CA$39m, being 306% of its EBIT. So is Genesis Land Development's debt a risk? It doesn't seem so to us. 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. To that end, you should learn about the 3 warning signs we've spotted with Genesis Land Development (including 1 which is a bit concerning) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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