Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that genOway Société anonyme (EPA:ALGEN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does genOway Société anonyme Carry?
You can click the graphic below for the historical numbers, but it shows that genOway Société anonyme had €9.39m of debt in June 2021, down from €11.0m, one year before. On the flip side, it has €2.75m in cash leading to net debt of about €6.64m.
How Healthy Is genOway Société anonyme's Balance Sheet?
We can see from the most recent balance sheet that genOway Société anonyme had liabilities of €7.71m falling due within a year, and liabilities of €8.65m due beyond that. Offsetting these obligations, it had cash of €2.75m as well as receivables valued at €13.0m due within 12 months. So it has liabilities totalling €638.9k more than its cash and near-term receivables, combined.
This state of affairs indicates that genOway Société anonyme's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the €38.6m company is struggling for cash, we still think it's worth monitoring its balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. But it is genOway Société anonyme'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.
In the last year genOway Société anonyme wasn't profitable at an EBIT level, but managed to grow its revenue by 21%, to €18m. With any luck the company will be able to grow its way to profitability.
While we can certainly appreciate genOway Société anonyme's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost €400k at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled €8.7m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for genOway Société anonyme (2 don't sit too well with us) 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.
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.
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