Genimous Technology (SZSE:000676) Could Easily Take On More Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Genimous Technology Co., Ltd. (SZSE:000676) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Genimous Technology

What Is Genimous Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that Genimous Technology had CN¥100.2m of debt in March 2024, down from CN¥246.3m, one year before. However, it does have CN¥1.48b in cash offsetting this, leading to net cash of CN¥1.38b.

How Strong Is Genimous Technology's Balance Sheet?

According to the last reported balance sheet, Genimous Technology had liabilities of CN¥473.9m due within 12 months, and liabilities of CN¥25.5m due beyond 12 months. On the other hand, it had cash of CN¥1.48b and CN¥655.8m worth of receivables due within a year. So it can boast CN¥1.63b more liquid assets than total liabilities.

This excess liquidity suggests that Genimous Technology is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Genimous Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Genimous Technology grew its EBIT by 101% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Genimous Technology's earnings that will influence how the balance sheet holds up in the future. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Happily for any shareholders, Genimous Technology actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

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. The cherry on top was that in converted 298% of that EBIT to free cash flow, bringing in -CN¥43m. The bottom line is that we do not find Genimous Technology's debt levels at all concerning. 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.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com