Is GEOMATEC (TYO:6907) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that GEOMATEC Co., Ltd. (TYO:6907) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for GEOMATEC

What Is GEOMATEC's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 GEOMATEC had debt of JP¥1.47b, up from JP¥1.11b in one year. However, its balance sheet shows it holds JP¥6.58b in cash, so it actually has JP¥5.11b net cash.

How Healthy Is GEOMATEC's Balance Sheet?

The latest balance sheet data shows that GEOMATEC had liabilities of JP¥4.85b due within a year, and liabilities of JP¥1.29b falling due after that. Offsetting this, it had JP¥6.58b in cash and JP¥5.36b in receivables that were due within 12 months. So it actually has JP¥5.80b more liquid assets than total liabilities.

This surplus strongly suggests that GEOMATEC has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that GEOMATEC has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since GEOMATEC 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.

In the last year GEOMATEC wasn't profitable at an EBIT level, but managed to grow its revenue by 7.1%, to JP¥6.0b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is GEOMATEC?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months GEOMATEC lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of JP¥1.5b and booked a JP¥1.5b accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of JP¥5.11b. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for GEOMATEC you should be aware of, and 1 of them is a bit unpleasant.

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. 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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