Does Genesys Logic (GTSM:6104) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Genesys Logic, Inc. (GTSM:6104) does carry debt. But is this debt a concern to shareholders?

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. 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. 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.

View our latest analysis for Genesys Logic

How Much Debt Does Genesys Logic Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Genesys Logic had NT$450.0m of debt, an increase on NT$282.0m, over one year. But it also has NT$452.6m in cash to offset that, meaning it has NT$2.63m net cash.

How Strong Is Genesys Logic's Balance Sheet?

The latest balance sheet data shows that Genesys Logic had liabilities of NT$929.9m due within a year, and liabilities of NT$34.2m falling due after that. Offsetting this, it had NT$452.6m in cash and NT$287.3m in receivables that were due within 12 months. So it has liabilities totalling NT$224.2m more than its cash and near-term receivables, combined.

Given Genesys Logic has a market capitalization of NT$6.52b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Genesys Logic boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Genesys Logic has boosted its EBIT by 87%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Genesys Logic will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Genesys Logic 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. Over the most recent three years, Genesys Logic recorded free cash flow worth 66% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

We could understand if investors are concerned about Genesys Logic's liabilities, but we can be reassured by the fact it has has net cash of NT$2.63m. And it impressed us with its EBIT growth of 87% over the last year. So we don't think Genesys Logic's use of debt is risky. 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. For instance, we've identified 1 warning sign for Genesys Logic that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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