Is Genolution (KOSDAQ:225220) Using Debt In A Risky Way?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Genolution Inc. (KOSDAQ:225220) does have debt on its balance sheet. But is this debt a concern to shareholders?

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When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 step when considering a company's debt levels is to consider its cash and debt together.

What Is Genolution's Debt?

The chart below, which you can click on for greater detail, shows that Genolution had ₩24.0b in debt in December 2024; about the same as the year before. However, its balance sheet shows it holds ₩33.2b in cash, so it actually has ₩9.24b net cash.

How Strong Is Genolution's Balance Sheet?

The latest balance sheet data shows that Genolution had liabilities of ₩5.82b due within a year, and liabilities of ₩20.2b falling due after that. Offsetting this, it had ₩33.2b in cash and ₩1.09b in receivables that were due within 12 months. So it can boast ₩8.25b more liquid assets than total liabilities.

This surplus suggests that Genolution is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Genolution 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 it is Genolution'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.

Check out our latest analysis for Genolution

In the last year Genolution had a loss before interest and tax, and actually shrunk its revenue by 27%, to ₩7.1b. That makes us nervous, to say the least.

So How Risky Is Genolution?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Genolution lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through ₩14b of cash and made a loss of ₩6.8b. But at least it has ₩9.24b on the balance sheet to spend on growth, near-term. 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. 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 learn about the 2 warning signs we've spotted with Genolution (including 1 which is potentially serious) .

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.