These 4 Measures Indicate That GENOVA (TSE:9341) Is Using Debt Safely

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.' 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 GENOVA, Inc. (TSE:9341) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for GENOVA

What Is GENOVA's Debt?

As you can see below, at the end of March 2024, GENOVA had JP¥376.0m of debt, up from JP¥25.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds JP¥5.97b in cash, so it actually has JP¥5.59b net cash.

How Healthy Is GENOVA's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that GENOVA had liabilities of JP¥2.13b due within 12 months and liabilities of JP¥38.0m due beyond that. Offsetting these obligations, it had cash of JP¥5.97b as well as receivables valued at JP¥1.46b due within 12 months. So it actually has JP¥5.26b more liquid assets than total liabilities.

It's good to see that GENOVA has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, GENOVA boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that GENOVA has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is GENOVA's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. GENOVA 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. During the last three years, GENOVA produced sturdy free cash flow equating to 56% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case GENOVA has JP¥5.59b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 33% over the last year. So we don't think GENOVA's use of debt is risky. 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 GENOVA that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com