We Think Genoray (KOSDAQ:122310) Can Stay On Top Of Its Debt

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. Importantly, Genoray Co., Ltd. (KOSDAQ:122310) does carry debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Genoray

What Is Genoray's Debt?

As you can see below, at the end of September 2020, Genoray had ₩9.67b of debt, up from ₩8.86b a year ago. Click the image for more detail. However, it does have ₩25.0b in cash offsetting this, leading to net cash of ₩15.3b.

How Strong Is Genoray's Balance Sheet?

The latest balance sheet data shows that Genoray had liabilities of ₩16.8b due within a year, and liabilities of ₩1.72b falling due after that. Offsetting these obligations, it had cash of ₩25.0b as well as receivables valued at ₩11.8b due within 12 months. So it actually has ₩18.3b more liquid assets than total liabilities.

This surplus suggests that Genoray has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Genoray boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Genoray grew its EBIT by 9.1% in the last year, making that debt load look even more manageable. 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. On top of that, it increased its EBIT by 9.1% in the last twelve months. So we don't think Genoray's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Genoray , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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