Genesys International (NSE:GENESYS) Takes On Some Risk With Its Use Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Genesys International Corporation Limited (NSE:GENESYS) does carry debt. 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Genesys International

How Much Debt Does Genesys International Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Genesys International had ₹323.8m of debt, an increase on ₹265.0m, over one year. However, it does have ₹691.3m in cash offsetting this, leading to net cash of ₹367.5m.

How Healthy Is Genesys International's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Genesys International had liabilities of ₹690.8m due within 12 months and liabilities of ₹290.6m due beyond that. Offsetting this, it had ₹691.3m in cash and ₹832.6m in receivables that were due within 12 months. So it can boast ₹542.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Genesys International could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Genesys International boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Genesys International's EBIT fell a jaw-dropping 46% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Genesys International will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Genesys International 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. During the last two years, Genesys International burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Genesys International has net cash of ₹367.5m, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about Genesys International's balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Genesys International (1 can't be ignored) you should be aware of.

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.