Is Genesis Photonics (TPE:3383) Using Debt In A Risky Way?

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.' 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. We can see that Genesis Photonics Inc. (TPE:3383) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Genesis Photonics

What Is Genesis Photonics's Debt?

The chart below, which you can click on for greater detail, shows that Genesis Photonics had NT$2.57b in debt in December 2020; about the same as the year before. However, because it has a cash reserve of NT$79.1m, its net debt is less, at about NT$2.49b.

How Strong Is Genesis Photonics' Balance Sheet?

The latest balance sheet data shows that Genesis Photonics had liabilities of NT$414.0m due within a year, and liabilities of NT$2.36b falling due after that. Offsetting these obligations, it had cash of NT$79.1m as well as receivables valued at NT$176.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$2.52b.

This deficit casts a shadow over the NT$336.0m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Genesis Photonics would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Genesis Photonics's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Genesis Photonics made a loss at the EBIT level, and saw its revenue drop to NT$552m, which is a fall of 26%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Genesis Photonics's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping NT$238m. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it burned through NT$66m in the last year. So is this a high risk stock? We think so, and we'd avoid it. 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 example Genesis Photonics has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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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