Genetec (TSE:4492) Could Easily Take On More Debt

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.' 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. We note that Genetec Corporation (TSE:4492) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Our free stock report includes 3 warning signs investors should be aware of before investing in Genetec. Read for free now.

What Risk Does Debt Bring?

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. 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.

What Is Genetec's Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Genetec had debt of JP¥1.09b, up from JP¥755.0m in one year. But on the other hand it also has JP¥1.43b in cash, leading to a JP¥343.0m net cash position.

How Strong Is Genetec's Balance Sheet?

We can see from the most recent balance sheet that Genetec had liabilities of JP¥1.68b falling due within a year, and liabilities of JP¥655.0m due beyond that. Offsetting these obligations, it had cash of JP¥1.43b as well as receivables valued at JP¥1.20b due within 12 months. So it actually has JP¥297.0m more liquid assets than total liabilities.

This surplus suggests that Genetec has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Genetec has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Genetec

Also positive, Genetec grew its EBIT by 25% in the last year, and that should make it 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Over the most recent two years, Genetec recorded free cash flow worth 66% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 Genetec has JP¥343.0m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 25% over the last year. So is Genetec's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Genetec you should know about.

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.