These 4 Measures Indicate That Genesco (NYSE:GCO) Is Using Debt Reasonably Well
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 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 Genesco Inc. (NYSE:GCO) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Genesco
What Is Genesco's Debt?
The image below, which you can click on for greater detail, shows that Genesco had debt of US$73.7m at the end of May 2019, a reduction from US$105.7m over a year. But it also has US$156.7m in cash to offset that, meaning it has US$83.0m net cash.
How Strong Is Genesco's Balance Sheet?
According to the last reported balance sheet, Genesco had liabilities of US$363.9m due within 12 months, and liabilities of US$789.3m due beyond 12 months. Offsetting these obligations, it had cash of US$156.7m as well as receivables valued at US$33.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$963.2m.
This deficit casts a shadow over the US$589.9m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt After all, Genesco would likely require a major re-capitalisation if it had to pay its creditors today. Genesco 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.
Fortunately, Genesco grew its EBIT by 5.9% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Genesco 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, Genesco generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.
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$83m. The cherry on top was that in converted 82% of that EBIT to free cash flow, bringing in US$156m. So we are not troubled with Genesco's debt use. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Genesco insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.
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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