Is Genome (KOSDAQ:314130) Using Debt In A Risky Way?

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.' 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. We note that Genome & Company (KOSDAQ:314130) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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.

Check out our latest analysis for Genome

What Is Genome's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Genome had ₩14.4b of debt, an increase on none, over one year. However, it does have ₩99.9b in cash offsetting this, leading to net cash of ₩85.5b.

How Healthy Is Genome's Balance Sheet?

According to the last reported balance sheet, Genome had liabilities of ₩28.9b due within 12 months, and liabilities of ₩20.7b due beyond 12 months. On the other hand, it had cash of ₩99.9b and ₩2.96b worth of receivables due within a year. So it actually has ₩53.4b more liquid assets than total liabilities.

This surplus liquidity suggests that Genome's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Genome boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Genome'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 Genome wasn't profitable at an EBIT level, but managed to grow its revenue by 40%, to ₩15b. With any luck the company will be able to grow its way to profitability.

So How Risky Is Genome?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Genome had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of ₩53b and booked a ₩40b accounting loss. However, it has net cash of ₩85.5b, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, Genome may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Genome you should know about.

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. 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.