Is Genesis Resources (ASX:GES) A Risky Investment?

An external fund manager supported by Charlie Munger of Berkshire Hathaway, Li Lu, is in no doubt about it when he says ‘The biggest investment risk is not price volatility, but if you experience permanent capital loss.’ So it may be obvious that you need to consider debt, when you think about how risky any stock is, because too much debt can sink a company. As with many other companies Genesis Resources Limited (ASX:GES) uses debt. But should shareholders be concerned about its use of debt?

When Is Debt a Problem?

Debt helps a business until the business has trouble repaying it, either with new capital or with free cash flow. Finally, if the company cannot meet its legal obligations to repay the debt, the shareholders may walk away with nothing. However, a frequent (but still costly) event is where a company must issue shares at rock-bottom prices, undermining shareholders entirely, just to keep its balance sheet. Having said that, the normal situation is where the company manages its debts well – and to its own benefit. When we think about a company’s debt utilization, we first look at cash and debt together.

Check out our latest analysis of Genesis Resources

What is Genesis Resources’ Net Debt?

The image below, which you can click on for more details, shows that in December 2023 Genesis Resources had debt of AU$12.3m, up from AU$10.3m a year earlier. Real debt is fine, since it doesn’t have a lot of cash.

Looking at the Debts of the Beginning Resources

Looking at the latest balance sheet data, we can see that Genesis Resources had AU$17.1m of liabilities due within 12 months and no liabilities beyond that. On the other hand, it had AU$56.5k in cash and AU$103.1k of receivables due within a year. So its liabilities exceed the sum of its cash and (near term) receivables by AU$17.0m.

This deficit casts a shadow over the AU$4.70m company, like a monster towering over mankind. So we think shareholders need to watch this closely. At the end of the day, Genesis Resources would probably need a lot of capital if its creditors were to demand payment. The balance sheet is clearly an area of ​​focus when analyzing debt. But you cannot see debt in complete isolation; as Genesis Resources will need income to pay off the debt. So if you’re interested in discovering more about his earnings, it might be worth checking out this graph of his long-term earnings trends.

Given its lack of meaningful operating income, investors are probably hoping that Genesis Resources will find a significant asset, before it runs out of money.

Caveat Emptor

More importantly, Genesis Resources had earnings before interest and tax loss (EBIT) in the past year. Indeed, it lost a whopping AU$1.2m in EBIT terms. Considering the large liabilities mentioned above, we are very wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that’s unlikely, given that it’s a poor liquid asset, and was burned by AU$2.1m in the past year. So we consider this stock to be high risk and we won’t be at all surprised if the company asks shareholders for money before long. The balance sheet is clearly an area of ​​focus when analyzing debt. However, not all investment risks are on the balance sheet – far from it. For example, we have discovered 5 Warning Signs of Genesis Resources which you should be aware of.

When all is said and done, it’s sometimes easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with no real debt 100% freeright now.

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