Does Genesis Technology (GTSM:6221) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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 Technology, Inc. (GTSM:6221) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Genesis Technology

How Much Debt Does Genesis Technology Carry?

As you can see below, Genesis Technology had NT$443.0m of debt at September 2020, down from NT$730.9m a year prior. But on the other hand it also has NT$776.8m in cash, leading to a NT$333.8m net cash position.

A Look At Genesis Technology's Liabilities

We can see from the most recent balance sheet that Genesis Technology had liabilities of NT$1.44b falling due within a year, and liabilities of NT$152.0m due beyond that. Offsetting these obligations, it had cash of NT$776.8m as well as receivables valued at NT$516.1m due within 12 months. So it has liabilities totalling NT$297.7m more than its cash and near-term receivables, combined.

Of course, Genesis Technology has a market capitalization of NT$2.33b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Genesis Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

Another good sign is that Genesis Technology has been able to increase its EBIT by 29% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But it is Genesis Technology'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. While Genesis Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Genesis Technology produced sturdy free cash flow equating to 60% 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

Although Genesis Technology's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of NT$333.8m. And it impressed us with its EBIT growth of 29% over the last year. So we don't think Genesis Technology's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with Genesis Technology .

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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