Is Genesem (KOSDAQ:217190) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Genesem Inc. (KOSDAQ:217190) makes use of debt. But should shareholders be worried about its use of debt?

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What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is Genesem's Net Debt?

As you can see below, Genesem had ₩20.0b of debt, at December 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have ₩20.0b in cash offsetting this, leading to net cash of ₩30.4m.

A Look At Genesem's Liabilities

The latest balance sheet data shows that Genesem had liabilities of ₩29.7b due within a year, and liabilities of ₩6.81b falling due after that. Offsetting these obligations, it had cash of ₩20.0b as well as receivables valued at ₩9.02b due within 12 months. So its liabilities total ₩7.46b more than the combination of its cash and short-term receivables.

Since publicly traded Genesem shares are worth a total of ₩58.9b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Genesem boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Genesem

On top of that, Genesem grew its EBIT by 84% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Genesem'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. Genesem may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Genesem actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Genesem does have more liabilities than liquid assets, it also has net cash of ₩30.4m. And it impressed us with free cash flow of ₩8.5b, being 102% of its EBIT. So is Genesem's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 2 warning signs for Genesem you should be aware of.

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.