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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Genic Co., Ltd. (KOSDAQ:123330) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.
See our latest analysis for Genic
What Is Genic's Net Debt?
As you can see below, Genic had ₩23.5b of debt at September 2020, down from ₩32.4b a year prior. On the flip side, it has ₩6.59b in cash leading to net debt of about ₩16.9b.
How Healthy Is Genic's Balance Sheet?
According to the last reported balance sheet, Genic had liabilities of ₩17.5b due within 12 months, and liabilities of ₩10.2b due beyond 12 months. Offsetting this, it had ₩6.59b in cash and ₩6.57b in receivables that were due within 12 months. So its liabilities total ₩14.5b more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since Genic has a market capitalization of ₩25.4b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Genic'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.
In the last year Genic wasn't profitable at an EBIT level, but managed to grow its revenue by 3.0%, to ₩51b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Importantly, Genic had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping ₩4.6b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₩1.0b of cash over the last year. So to be blunt we think it is risky. 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. To that end, you should learn about the 2 warning signs we've spotted with Genic (including 1 which is is concerning) .
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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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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About KOSDAQ:A123330
Genic
Researches, develops, manufactures, and sells cosmetics and pharmaceuticals in South Korea and internationally.
Moderate with adequate balance sheet.
