Yahoo Finance These 4 Measures Indicate That Genie Energy (NYSE:GNE) Is Using Debt Reasonably Well
Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. 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, Genie Energy Ltd. (NYSE:GNE) does carry debt. But the real question is whether this debt is making the company risky.
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Genie Energy
What Is Genie Energy's Net Debt?
As you can see below, at the end of June 2019, Genie Energy had US$3.43m of debt, up from US$2.51m a year ago. Click the image for more detail. But on the other hand it also has US$32.9m in cash, leading to a US$29.5m net cash position.
How Healthy Is Genie Energy's Balance Sheet?
The latest balance sheet data shows that Genie Energy had liabilities of US$53.5m due within a year, and liabilities of US$5.40m falling due after that. On the other hand, it had cash of US$32.9m and US$35.2m worth of receivables due within a year. So it actually has US$9.30m more liquid assets than total liabilities.
This surplus suggests that Genie Energy has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Genie Energy boasts net cash, so it's fair to say it does not have a heavy debt load!
The modesty of its debt load may become crucial for Genie Energy if management cannot prevent a repeat of the 66% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Genie 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Genie Energy has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, Genie Energy actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Genie Energy has net cash of US$29.5m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$9.9m, being 142% of its EBIT. So is Genie Energy's debt a risk? It doesn't seem so to us. We'd be motivated to research the stock further if we found out that Genie Energy insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
