ToysRUs ANZ (ASX:TOY) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Toys"R"Us ANZ Limited (ASX:TOY) 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?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for ToysRUs ANZ

What Is ToysRUs ANZ's Debt?

The image below, which you can click on for greater detail, shows that at July 2022 ToysRUs ANZ had debt of AU$10.0m, up from none in one year. But on the other hand it also has AU$12.5m in cash, leading to a AU$2.54m net cash position.

How Healthy Is ToysRUs ANZ's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ToysRUs ANZ had liabilities of AU$6.24m due within 12 months and liabilities of AU$11.1m due beyond that. On the other hand, it had cash of AU$12.5m and AU$794.0k worth of receivables due within a year. So its liabilities total AU$3.98m more than the combination of its cash and short-term receivables.

Since publicly traded ToysRUs ANZ shares are worth a total of AU$25.9m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, ToysRUs ANZ also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if ToysRUs ANZ can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, ToysRUs ANZ reported revenue of AU$38m, which is a gain of 74%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is ToysRUs ANZ?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that ToysRUs ANZ had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of AU$12m and booked a AU$25m accounting loss. With only AU$2.54m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, ToysRUs ANZ may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for ToysRUs ANZ (1 is concerning!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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