Is Genel Energy (LON:GENL) Using Debt Sensibly?
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Genel Energy plc (LON:GENL) does carry debt. But should shareholders be worried about its use of debt?
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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Genel Energy
What Is Genel Energy's Debt?
The chart below, which you can click on for greater detail, shows that Genel Energy had US$297.3m in debt in December 2018; about the same as the year before. But on the other hand it also has US$334.3m in cash, leading to a US$37.0m net cash position.
How Healthy Is Genel Energy's Balance Sheet?
According to the last reported balance sheet, Genel Energy had liabilities of US$57.6m due within 12 months, and liabilities of US$438.9m due beyond 12 months. Offsetting these obligations, it had cash of US$334.3m as well as receivables valued at US$99.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$62.8m.
Given Genel Energy has a market capitalization of US$652.7m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Genel Energy'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.
Over 12 months, Genel Energy reported revenue of US$355m, which is a gain of 55%. With any luck the company will be able to grow its way to profitability.
So How Risky Is Genel Energy?
Although Genel Energy had negative earnings before interest and tax (EBIT) over the last twelve months, it generated positive free cash flow of US$194m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. One positive is that Genel Energy is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But we still think it's somewhat risky. For riskier companies like Genel Energy I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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