Does Genoray (KOSDAQ:122310) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Genoray Co., Ltd. (KOSDAQ:122310) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Genoray

How Much Debt Does Genoray Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Genoray had ₩9.67b of debt, an increase on ₩8.86b, over one year. But it also has ₩25.0b in cash to offset that, meaning it has ₩15.3b net cash.

How Healthy Is Genoray's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Genoray had liabilities of ₩16.8b due within 12 months and liabilities of ₩1.72b due beyond that. Offsetting this, it had ₩25.0b in cash and ₩11.8b in receivables that were due within 12 months. So it can boast ₩18.3b more liquid assets than total liabilities.

This short term liquidity is a sign that Genoray could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Genoray has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Genoray has increased its EBIT by 9.1% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is Genoray'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Genoray has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Genoray's free cash flow amounted to 27% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Genoray has ₩15.3b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 9.1% over the last year. So we don't think Genoray'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. To that end, you should be aware of the 2 warning signs we've spotted with Genoray .

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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