We Think Genimous Technology (SZSE:000676) Can Stay On Top Of Its 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.' 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 can see that Genimous Technology Co., Ltd. (SZSE:000676) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Genimous Technology

What Is Genimous Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Genimous Technology had CN¥226.7m of debt in September 2024, down from CN¥244.8m, one year before. But on the other hand it also has CN¥1.45b in cash, leading to a CN¥1.23b net cash position.

How Healthy Is Genimous Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Genimous Technology had liabilities of CN¥723.8m due within 12 months and liabilities of CN¥22.7m due beyond that. On the other hand, it had cash of CN¥1.45b and CN¥954.8m worth of receivables due within a year. So it actually has CN¥1.66b more liquid assets than total liabilities.

This surplus suggests that Genimous Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Genimous Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Genimous Technology if management cannot prevent a repeat of the 41% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last three years, Genimous Technology actually produced more free cash flow than EBIT. 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¥1.23b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 295% of that EBIT to free cash flow, bringing in CN¥19m. So we don't have any problem with Genimous Technology's use of debt. 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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

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.