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.' 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 note that Genesis Land Development Corp. (TSE:GDC) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Genesis Land Development

What Is Genesis Land Development's Net Debt?

The image below, which you can click on for greater detail, shows that Genesis Land Development had debt of CA$21.5m at the end of December 2020, a reduction from CA$51.5m over a year. However, its balance sheet shows it holds CA$29.7m in cash, so it actually has CA$8.27m net cash.

How Strong Is Genesis Land Development's Balance Sheet?

We can see from the most recent balance sheet that Genesis Land Development had liabilities of CA$32.6m falling due within a year, and liabilities of CA$34.1m due beyond that. Offsetting this, it had CA$29.7m in cash and CA$14.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$22.7m.

This deficit isn't so bad because Genesis Land Development is worth CA$89.2m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Genesis Land Development also has more cash than debt, so we're pretty confident it can manage its debt safely.

Shareholders should be aware that Genesis Land Development's EBIT was down 86% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Genesis Land Development's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.