Is Genetec (TSE:4492) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Genetec Corporation (TSE:4492) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Genetec

What Is Genetec's Debt?

As you can see below, Genetec had JP¥925.0m of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has JP¥1.24b in cash to offset that, meaning it has JP¥314.0m net cash.

A Look At Genetec's Liabilities

According to the last reported balance sheet, Genetec had liabilities of JP¥1.74b due within 12 months, and liabilities of JP¥540.0m due beyond 12 months. Offsetting this, it had JP¥1.24b in cash and JP¥1.18b in receivables that were due within 12 months. So it can boast JP¥142.0m 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.

Even more impressive was the fact that Genetec grew its EBIT by 206% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Genetec 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 company can only pay off debt with cold hard cash, not accounting profits. 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. Looking at the most recent two years, Genetec recorded free cash flow of 37% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Genetec has JP¥314.0m in net cash and a decent-looking balance sheet. And we liked the look of last year's 206% year-on-year EBIT growth. So we don't think Genetec's use of debt is risky. 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. Case in point: We've spotted 3 warning signs for Genetec you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.