Genesis Land Development (TSE: GDC) has a pretty healthy track record

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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. Above all, Genesis Land Development Corp. (TSE: GDC) is in debt. But does this debt worry shareholders?

What risk does debt entail?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first look at cash and debt levels, together.

See our latest review for Genesis Land Development

What is the debt of Genesis Land Development?

As you can see below, Genesis Land Development had C $ 18.0 million in debt in June 2021, up from C $ 46.0 million the year before. However, it has C $ 25.7 million in cash offsetting this, leading to net cash of C $ 7.73 million.

debt-equity-historical-analysis

A look at the responsibilities of Genesis Land Development

We can see from the most recent balance sheet that Genesis Land Development had liabilities of C $ 36.5 million maturing within one year and liabilities of C $ 35.8 million maturing within one year. of the. In return, he had C $ 25.7 million in cash and C $ 14.3 million in receivables due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by C $ 32.2 million.

While that might sound like a lot, it’s not that bad since Genesis Land Development has a market cap of C $ 112.6 million, and could therefore likely strengthen its balance sheet by raising capital if needed. However, it is always worth taking a close look at your ability to repay debts. While it has some liabilities to note, Genesis Land Development also has more cash than debt, so we’re pretty confident it can handle its debt safely.

Although Genesis Land Development recorded a loss in EBIT, last year it was also good to see that it generated CA $ 12 million in EBIT over the past twelve months. When analyzing debt levels, the balance sheet is the obvious starting point. But it is the profits from Genesis Land Development that will influence the way the balance sheet is held in the future. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.

Finally, while the IRS may love accounting profits, lenders only accept hard cash. Although Genesis Land Development has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it’s building. (or erode) that cash balance. Fortunately for all shareholders, Genesis Land Development has actually generated more free cash flow than EBIT over the past year. This kind of solid money conversion makes us as excited as the crowd when the beat drops at a Daft Punk concert.

In summary

Although Genesis Land Development has more liabilities than liquid assets, it also has net cash of C $ 7.73 million. And he impressed us with free cash flow of C $ 39 million, or 342% of his EBIT. So we have no problem with the use of debt by Genesis Land Development. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. Be aware that Genesis Land Development shows 2 warning signs in our investment analysis , and 1 of them is significant …

If you want to invest in companies that can generate profits without the burden of debt, check out this free list of growing companies that have net cash on the balance sheet.

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

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