Yahoo Finance Is Genel Energy (LON:GENL) Weighed On By Its Debt Load?
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. 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 Genel Energy plc (LON:GENL) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Genel Energy
How Much Debt Does Genel Energy Carry?
As you can see below, Genel Energy had US$297.5m of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. However, it does have US$353.3m in cash offsetting this, leading to net cash of US$55.8m.
How Healthy Is Genel Energy's Balance Sheet?
According to the last reported balance sheet, Genel Energy had liabilities of US$71.5m due within 12 months, and liabilities of US$481.1m due beyond 12 months. Offsetting these obligations, it had cash of US$353.3m as well as receivables valued at US$125.6m due within 12 months. So its liabilities total US$73.7m more than the combination of its cash and short-term receivables.
Of course, Genel Energy has a market capitalization of US$683.1m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Genel Energy also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Genel Energy 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.
In the last year Genel Energy wasn't profitable at an EBIT level, but managed to grow its revenue by 28%, to US$388m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Genel Energy?
While Genel Energy lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$181m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. The good news for Genel Energy shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But we still think it's somewhat risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Genel Energy that you should be aware of.
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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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