Genius Brands International (NASDAQ:GNUS) Is Using Debt Safely

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. 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.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

See our latest analysis for Genius Brands International

What Is Genius Brands International's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Genius Brands International had US$83.7m of debt, an increase on US$116.2k, over one year. However, its balance sheet shows it holds US$97.0m in cash, so it actually has US$13.2m net cash.

A Look At Genius Brands International's Liabilities

We can see from the most recent balance sheet that Genius Brands International had liabilities of US$111.2m falling due within a year, and liabilities of US$14.4m due beyond that. On the other hand, it had cash of US$97.0m and US$41.4m worth of receivables due within a year. So it can boast US$12.9m more liquid assets than total liabilities.

This surplus suggests that Genius Brands International has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Genius Brands International has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Genius Brands International's earnings that will influence how the balance sheet holds up in the future. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 595%, to US$46m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

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. And over the same period it saw negative free cash outflow of US$32m and booked a US$62m accounting loss. Given it only has net cash of US$13.2m, the company may need to raise more capital if it doesn't reach break-even soon. The good news for shareholders is that Genius Brands International has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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 example Genius Brands International has 4 warning signs (and 1 which is a bit concerning) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.