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Is Gentherm (NASDAQ:THRM) A Risky Investment?

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·4 min read
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  • THRM

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Gentherm Incorporated (NASDAQ:THRM) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Gentherm

How Much Debt Does Gentherm Carry?

You can click the graphic below for the historical numbers, but it shows that Gentherm had US$40.0m of debt in September 2021, down from US$195.6m, one year before. But on the other hand it also has US$195.1m in cash, leading to a US$155.1m net cash position.

debt-equity-history-analysis
debt-equity-history-analysis

How Strong Is Gentherm's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Gentherm had liabilities of US$215.4m due within 12 months and liabilities of US$73.1m due beyond that. Offsetting these obligations, it had cash of US$195.1m as well as receivables valued at US$217.4m due within 12 months. So it can boast US$124.0m more liquid assets than total liabilities.

This surplus suggests that Gentherm has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Gentherm has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Gentherm has boosted its EBIT by 91%, thus reducing the spectre of future debt repayments. 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 Gentherm'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Gentherm 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. Over the last three years, Gentherm recorded free cash flow worth a fulsome 97% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Gentherm has US$155.1m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 97% of that EBIT to free cash flow, bringing in US$112m. So is Gentherm's debt a risk? It doesn't seem so to us. 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 example, we've discovered 1 warning sign for Gentherm that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.