Is Genesis Photonics (TPE:3383) Weighed On By Its Debt Load?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Genesis Photonics Inc. (TPE:3383) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View 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 September 2020; about the same as the year before. However, because it has a cash reserve of NT$77.2m, its net debt is less, at about NT$2.49b.

How Healthy Is Genesis Photonics's Balance Sheet?

We can see from the most recent balance sheet that Genesis Photonics had liabilities of NT$582.0m falling due within a year, and liabilities of NT$2.20b due beyond that. Offsetting this, it had NT$77.2m in cash and NT$163.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$2.54b.

This deficit casts a shadow over the NT$259.7m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Genesis Photonics would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Genesis Photonics 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.

Over 12 months, Genesis Photonics made a loss at the EBIT level, and saw its revenue drop to NT$629m, which is a fall of 9.0%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Genesis Photonics produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable NT$243m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it burned through NT$14m 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. To that end, you should learn about the 2 warning signs we've spotted with Genesis Photonics (including 1 which doesn't sit too well with us) .

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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