Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Genetec Corporation (TSE:4492) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Genetec
How Much Debt Does Genetec Carry?
As you can see below, Genetec had JP¥640.0m of debt at March 2024, down from JP¥975.0m a year prior. However, it does have JP¥1.17b in cash offsetting this, leading to net cash of JP¥528.0m.
How Strong Is Genetec's Balance Sheet?
We can see from the most recent balance sheet that Genetec had liabilities of JP¥1.76b falling due within a year, and liabilities of JP¥547.0m due beyond that. Offsetting this, it had JP¥1.17b in cash and JP¥1.44b in receivables that were due within 12 months. So it can boast JP¥299.0m more liquid assets than total liabilities.
This short term liquidity is a sign that Genetec could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Genetec boasts net cash, so it's fair to say it does not have a heavy debt load!
Better yet, Genetec grew its EBIT by 493% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Genetec's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Genetec 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. Considering the last three years, Genetec actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Genetec has net cash of JP¥528.0m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 493% over the last year. So is Genetec's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Genetec has 3 warning signs we think you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.
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About TSE:4492
Outstanding track record with excellent balance sheet.
