Does GeneReach Biotechnology (GTSM:4171) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies GeneReach Biotechnology Corp. (GTSM:4171) makes use of debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. 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 GeneReach Biotechnology

How Much Debt Does GeneReach Biotechnology Carry?

As you can see below, at the end of December 2020, GeneReach Biotechnology had NT$81.0m of debt, up from none a year ago. Click the image for more detail. However, it does have NT$313.7m in cash offsetting this, leading to net cash of NT$232.7m.

How Healthy Is GeneReach Biotechnology's Balance Sheet?

We can see from the most recent balance sheet that GeneReach Biotechnology had liabilities of NT$245.1m falling due within a year, and liabilities of NT$137.6m due beyond that. On the other hand, it had cash of NT$313.7m and NT$166.4m worth of receivables due within a year. So it actually has NT$97.4m more liquid assets than total liabilities.

This short term liquidity is a sign that GeneReach Biotechnology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, GeneReach Biotechnology boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that GeneReach Biotechnology grew its EBIT by 218% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is GeneReach Biotechnology'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. GeneReach Biotechnology 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. In the last three years, GeneReach Biotechnology created free cash flow amounting to 17% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case GeneReach Biotechnology has NT$232.7m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 218% over the last year. So is GeneReach Biotechnology's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for GeneReach Biotechnology (1 is potentially serious) you should be aware of.

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. 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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