Is Genel Energy (LON:GENL) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Genel Energy plc (LON:GENL) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Genel Energy

What Is Genel Energy's Net Debt?

As you can see below, Genel Energy had US$266.8m of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$425.0m in cash offsetting this, leading to net cash of US$158.2m.

A Look At Genel Energy's Liabilities

We can see from the most recent balance sheet that Genel Energy had liabilities of US$71.4m falling due within a year, and liabilities of US$327.2m due beyond that. On the other hand, it had cash of US$425.0m and US$100.6m worth of receivables due within a year. So it actually has US$127.0m more liquid assets than total liabilities.

This surplus liquidity suggests that Genel Energy's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Genel Energy 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 ultimately the future profitability of the business will decide if Genel Energy can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Genel Energy had a loss before interest and tax, and actually shrunk its revenue by 44%, to US$238m. To be frank that doesn't bode well.

So How Risky Is Genel Energy?

Although Genel Energy had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$100m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Genel Energy .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.