These 4 Measures Indicate That Genfit (EPA:GNFT) 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 Genfit S.A. (EPA:GNFT) makes use of debt. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

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

How Much Debt Does Genfit Carry?

The chart below, which you can click on for greater detail, shows that Genfit had €62.1m in debt in December 2024; about the same as the year before. But on the other hand it also has €81.8m in cash, leading to a €19.7m net cash position.

How Healthy Is Genfit's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Genfit had liabilities of €75.2m due within 12 months and liabilities of €7.04m due beyond that. Offsetting these obligations, it had cash of €81.8m as well as receivables valued at €7.56m due within 12 months. So it actually has €7.15m 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. Simply put, the fact that Genfit has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for Genfit

Notably, Genfit made a loss at the EBIT level, last year, but improved that to positive EBIT of €3.3m in the last twelve months. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Genfit 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. Over the last year, Genfit actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Genfit has net cash of €19.7m, as well as more liquid assets than liabilities. The cherry on top was that in converted 444% of that EBIT to free cash flow, bringing in €15m. So we don't have any problem with Genfit's use of debt. 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 example, we've discovered 1 warning sign for Genfit that you should be aware of before investing here.

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.