We Think Genius Electronic OpticalLtd (TWSE:3406) Can Manage Its Debt With Ease

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Genius Electronic Optical Co.,Ltd. (TWSE:3406) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Genius Electronic OpticalLtd

What Is Genius Electronic OpticalLtd's Net Debt?

As you can see below, Genius Electronic OpticalLtd had NT$7.50b of debt at September 2024, down from NT$11.0b a year prior. But on the other hand it also has NT$8.45b in cash, leading to a NT$952.5m net cash position.

A Look At Genius Electronic OpticalLtd's Liabilities

We can see from the most recent balance sheet that Genius Electronic OpticalLtd had liabilities of NT$8.94b falling due within a year, and liabilities of NT$9.71b due beyond that. On the other hand, it had cash of NT$8.45b and NT$6.00b worth of receivables due within a year. So its liabilities total NT$4.20b more than the combination of its cash and short-term receivables.

Since publicly traded Genius Electronic OpticalLtd shares are worth a total of NT$53.4b, 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 OpticalLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Genius Electronic OpticalLtd grew its EBIT by 63% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Genius Electronic OpticalLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Genius Electronic OpticalLtd 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, Genius Electronic OpticalLtd generated free cash flow amounting to a very robust 93% of its EBIT, more than we'd 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 OpticalLtd's liabilities, but we can be reassured by the fact it has has net cash of NT$952.5m. The cherry on top was that in converted 93% of that EBIT to free cash flow, bringing in NT$9.5b. So is Genius Electronic OpticalLtd's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Genius Electronic OpticalLtd , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.