We Think Genesys Logic (GTSM:6104) Can Manage Its Debt With Ease

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.' 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 Genesys Logic, Inc. (GTSM:6104) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Genesys Logic

What Is Genesys Logic's Net Debt?

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$656.3m in cash to offset that, meaning it has NT$206.3m net cash.

How Strong Is Genesys Logic's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Genesys Logic had liabilities of NT$929.9m due within 12 months and liabilities of NT$34.2m due beyond that. Offsetting these obligations, it had cash of NT$656.3m as well as receivables valued at NT$287.3m due within 12 months. So it has liabilities totalling NT$20.5m more than its cash and near-term receivables, combined.

This state of affairs indicates that Genesys Logic's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the NT$6.77b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Genesys Logic also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Genesys Logic has boosted its EBIT by 86%, 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 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, 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. During the last three years, Genesys Logic produced sturdy free cash flow equating to 66% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Genesys Logic has NT$206.3m in net cash. And it impressed us with its EBIT growth of 86% 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. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Genesys Logic .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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