Health Check: How Prudently Does Genius Brands International (NASDAQ:GNUS) Use Debt?

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.' 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. As with many other companies Genius Brands International, Inc. (NASDAQ:GNUS) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Genius Brands International

What Is Genius Brands International's Net Debt?

The image below, which you can click on for greater detail, shows that Genius Brands International had debt of US$1.87m at the end of September 2020, a reduction from US$6.10m over a year. However, its balance sheet shows it holds US$50.5m in cash, so it actually has US$48.6m net cash.

How Healthy Is Genius Brands International's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Genius Brands International had liabilities of US$6.99m due within 12 months and liabilities of US$9.07m due beyond that. Offsetting this, it had US$50.5m in cash and US$2.40m in receivables that were due within 12 months. So it actually has US$36.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Genius Brands International could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Genius Brands International boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Genius Brands International 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.

In the last year Genius Brands International had a loss before interest and tax, and actually shrunk its revenue by 65%, to US$1.9m. That makes us nervous, to say the least.

So How Risky Is Genius Brands International?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Genius Brands International had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$7.0m of cash and made a loss of US$395m. Given it only has net cash of US$48.6m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Case in point: We've spotted 4 warning signs for Genius Brands International you should be aware of, and 2 of them shouldn't be ignored.

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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