Is GEOMATEC (TYO:6907) A Risky Investment?

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. Importantly, GEOMATEC Co., Ltd. (TYO:6907) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for GEOMATEC

What Is GEOMATEC's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 GEOMATEC had debt of JP¥1.62b, up from JP¥1.27b in one year. But on the other hand it also has JP¥7.18b in cash, leading to a JP¥5.56b net cash position.

A Look At GEOMATEC's Liabilities

We can see from the most recent balance sheet that GEOMATEC had liabilities of JP¥3.54b falling due within a year, and liabilities of JP¥1.38b due beyond that. On the other hand, it had cash of JP¥7.18b and JP¥3.66b worth of receivables due within a year. So it actually has JP¥5.92b more liquid assets than total liabilities.

This luscious liquidity implies that GEOMATEC's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Succinctly put, GEOMATEC boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is GEOMATEC'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.

Over 12 months, GEOMATEC made a loss at the EBIT level, and saw its revenue drop to JP¥5.6b, which is a fall of 3.9%. That's not what we would hope to see.

So How Risky Is GEOMATEC?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that GEOMATEC 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¥1.5b and booked a JP¥1.3b accounting loss. But the saving grace is the JP¥5.56b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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, we've discovered 2 warning signs for GEOMATEC (1 is a bit unpleasant!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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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