David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Genfit SA (EPA:GNFT) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. 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.
How Much Debt Does Genfit Carry?
As you can see below, at the end of June 2019, Genfit had €180.1m of debt, up from €164.0m a year ago. Click the image for more detail. But it also has €281.9m in cash to offset that, meaning it has €101.8m net cash.
How Strong Is Genfit's Balance Sheet?
According to the last reported balance sheet, Genfit had liabilities of €47.2m due within 12 months, and liabilities of €180.4m due beyond 12 months. On the other hand, it had cash of €281.9m and €19.2m worth of receivables due within a year. So it can boast €73.4m more liquid assets than total liabilities.
This surplus suggests that Genfit has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Genfit has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Genfit 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.
Given its lack of meaningful operating revenue, Genfit shareholders no doubt hope it can fund itself until it has a profitable product.
So How Risky Is Genfit?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Genfit had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through €73m of cash and made a loss of €94m. But the saving grace is the €101.8m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Genfit's profit, revenue, and operating cashflow have changed over the last few years.
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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