Is Genfit (EPA:GNFT) A Risky Investment?

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. Importantly, Genfit SA (EPA:GNFT) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Genfit

What Is Genfit's Net Debt?

As you can see below, Genfit had €173.4m of debt, at June 2020, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has €225.7m in cash, leading to a €52.3m net cash position.

How Strong Is Genfit's Balance Sheet?

According to the last reported balance sheet, Genfit had liabilities of €41.7m due within 12 months, and liabilities of €183.1m due beyond 12 months. Offsetting this, it had €225.7m in cash and €8.94m in receivables that were due within 12 months. So it can boast €9.84m more liquid assets than total liabilities.

This surplus suggests that Genfit has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Genfit boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Genfit's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Genfit wasn't profitable at an EBIT level, but managed to grow its revenue by 389%, to €39m. That's virtually the hole-in-one of revenue growth!

So How Risky Is Genfit?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Genfit had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through €49m of cash and made a loss of €67m. But the saving grace is the €52.3m on the balance sheet. That means it could keep spending at its current rate for more than two years. The good news for shareholders is that Genfit has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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. Be aware that Genfit is showing 2 warning signs in our investment analysis , you should know about...

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. 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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