Here's Why Gentex (NASDAQ:GNTX) Can Manage Its Debt Responsibly

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.' 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 Gentex Corporation (NASDAQ:GNTX) makes use of debt. But the real question is whether this debt is making the company risky.

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Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

What Is Gentex's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2025 Gentex had US$3.93m of debt, an increase on none, over one year. However, its balance sheet shows it holds US$141.1m in cash, so it actually has US$137.1m net cash.

A Look At Gentex's Liabilities

We can see from the most recent balance sheet that Gentex had liabilities of US$336.9m falling due within a year, and liabilities of US$43.8m due beyond that. Offsetting these obligations, it had cash of US$141.1m as well as receivables valued at US$373.0m due within 12 months. So it actually has US$133.4m more liquid assets than total liabilities.

This surplus suggests that Gentex has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Gentex boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Gentex

On the other hand, Gentex saw its EBIT drop by 6.8% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Gentex 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. Gentex 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. During the last three years, Gentex produced sturdy free cash flow equating to 73% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Gentex has US$137.1m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 73% of that EBIT to free cash flow, bringing in US$405m. So we don't think Gentex's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Gentex, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.