These 4 Measures Indicate That GEN Restaurant Group (NASDAQ:GENK) Is Using Debt Extensively

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, GEN Restaurant Group, Inc. (NASDAQ:GENK) does carry debt. But the real question is whether this debt is making the company risky.

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When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does GEN Restaurant Group Carry?

As you can see below, at the end of December 2024, GEN Restaurant Group had US$9.86m of debt, up from US$8.61m a year ago. Click the image for more detail. But it also has US$23.7m in cash to offset that, meaning it has US$13.8m net cash.

How Strong Is GEN Restaurant Group's Balance Sheet?

We can see from the most recent balance sheet that GEN Restaurant Group had liabilities of US$41.1m falling due within a year, and liabilities of US$155.2m due beyond that. On the other hand, it had cash of US$23.7m and US$3.49m worth of receivables due within a year. So it has liabilities totalling US$169.1m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's US$138.2m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. GEN Restaurant Group boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

See our latest analysis for GEN Restaurant Group

The modesty of its debt load may become crucial for GEN Restaurant Group if management cannot prevent a repeat of the 94% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if GEN Restaurant Group 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. GEN Restaurant Group 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, GEN Restaurant Group produced sturdy free cash flow equating to 68% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

Although GEN Restaurant Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$13.8m. The cherry on top was that in converted 68% of that EBIT to free cash flow, bringing in -US$6.0m. So while GEN Restaurant Group does not have a great balance sheet, it's certainly not too bad. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for GEN Restaurant Group that you should be aware of.

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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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.