GNI Group (TSE:2160) Has Debt But No Earnings; Should You Worry?

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. We note that GNI Group Ltd. (TSE:2160) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does GNI Group Carry?

As you can see below, GNI Group had JP¥5.45b of debt at March 2025, down from JP¥5.89b a year prior. But it also has JP¥9.93b in cash to offset that, meaning it has JP¥4.48b net cash.

How Strong Is GNI Group's Balance Sheet?

According to the last reported balance sheet, GNI Group had liabilities of JP¥12.0b due within 12 months, and liabilities of JP¥19.4b due beyond 12 months. On the other hand, it had cash of JP¥9.93b and JP¥5.55b worth of receivables due within a year. So its liabilities total JP¥15.9b more than the combination of its cash and short-term receivables.

Since publicly traded GNI Group shares are worth a total of JP¥172.5b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, GNI Group boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if GNI Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

View our latest analysis for GNI Group

Over 12 months, GNI Group made a loss at the EBIT level, and saw its revenue drop to JP¥23b, which is a fall of 17%. That's not what we would hope to see.

So How Risky Is GNI Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that GNI Group had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of JP¥4.7b and booked a JP¥1.0b accounting loss. Given it only has net cash of JP¥4.48b, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for GNI Group 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.