Here's Why Genesco (NYSE:GCO) Can Manage Its Debt Responsibly

By
Simply Wall St
Published
August 27, 2021
NYSE:GCO
Source: Shutterstock

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. We can see that Genesco Inc. (NYSE:GCO) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Genesco

How Much Debt Does Genesco Carry?

You can click the graphic below for the historical numbers, but it shows that Genesco had US$44.2m of debt in May 2021, down from US$222.7m, one year before. But on the other hand it also has US$258.0m in cash, leading to a US$213.9m net cash position.

debt-equity-history-analysis
NYSE:GCO Debt to Equity History August 28th 2021

How Strong Is Genesco's Balance Sheet?

The latest balance sheet data shows that Genesco had liabilities of US$435.9m due within a year, and liabilities of US$647.4m falling due after that. Offsetting this, it had US$258.0m in cash and US$45.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$779.4m.

This deficit is considerable relative to its market capitalization of US$981.0m, so it does suggest shareholders should keep an eye on Genesco's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Genesco also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Genesco grew its EBIT by 496% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Genesco's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Genesco 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. Over the last three years, Genesco actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

Although Genesco'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$213.9m. And it impressed us with free cash flow of US$200m, being 244% of its EBIT. So is Genesco'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. For example, we've discovered 2 warning signs for Genesco (1 is potentially serious!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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