Genius Electronic Optical (TWSE:3406) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Genius Electronic Optical Co., Ltd (TWSE:3406) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Genius Electronic Optical

What Is Genius Electronic Optical's Debt?

As you can see below, Genius Electronic Optical had NT$9.93b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have NT$11.3b in cash offsetting this, leading to net cash of NT$1.36b.

A Look At Genius Electronic Optical's Liabilities

According to the last reported balance sheet, Genius Electronic Optical had liabilities of NT$11.4b due within 12 months, and liabilities of NT$10.4b due beyond 12 months. Offsetting this, it had NT$11.3b in cash and NT$3.99b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$6.54b.

Since publicly traded Genius Electronic Optical shares are worth a total of NT$71.0b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Genius Electronic Optical also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Genius Electronic Optical grew its EBIT by 29% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Genius Electronic Optical can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Genius Electronic Optical 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 last three years, Genius Electronic Optical recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

We could understand if investors are concerned about Genius Electronic Optical's liabilities, but we can be reassured by the fact it has has net cash of NT$1.36b. The cherry on top was that in converted 82% of that EBIT to free cash flow, bringing in NT$6.8b. So is Genius Electronic Optical's debt a risk? It doesn't seem so to us. 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. For example Genius Electronic Optical has 2 warning signs (and 1 which is significant) 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com