These 4 measures indicate that Genesco (NYSE:GCO) is using debt reasonably well

Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Like many other companies Genesco inc. (NYSE:GCO) uses debt. But the more important question is: what risk does this debt create?

What risk does debt carry?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we think about a company’s use of debt, we first look at cash and debt together.

See our latest analysis for Genesco

What is Genesco’s debt?

You can click on the chart below for historical numbers, but it shows Genesco had $14.7 million in debt in April 2022, up from $44.2 million a year prior. But he also has $200.6 million in cash to offset that, which means he has $185.9 million in net cash.

NYSE: GCO Debt to Equity History as of June 13, 2022

How strong is Genesco’s balance sheet?

The latest balance sheet data shows that Genesco had liabilities of $464.9 million maturing within one year, and liabilities of $483.2 million maturing thereafter. In return, it had $200.6 million in cash and $48.9 million in receivables due within 12 months. Thus, its liabilities total $698.6 million more than the combination of its cash and short-term receivables.

This is a mountain of leverage compared to its market capitalization of US$754.1 million. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet quickly. While he has liabilities to note, Genesco also has more cash than debt, so we’re pretty confident he can manage his debt safely.

On top of that, Genesco has grown its EBIT by 70% over the last twelve months, and this growth will make it easier to manage its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine Genesco’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, a company can only repay its debts with cold hard cash, not with book profits. Genesco may have net cash on the balance sheet, but it’s always interesting to see how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its ability to manage debt. Over the past three years, Genesco has actually produced more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.


Although Genesco’s balance sheet is not particularly strong, due to total liabilities, it is clearly positive to see that it has a net cash position of $185.9 million. And it impressed us with free cash flow of $46 million, or 144% of its EBIT. We therefore do not believe that Genesco’s use of debt is risky. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Know that Genesco shows 2 warning signs in our investment analysis and 1 of them makes us a little uncomfortable…

Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.

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

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