Brother Enterprises HoldingLtd (SZSE:002562) Is Making Moderate Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Brother Enterprises Holding Co.,Ltd. (SZSE:002562) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Brother Enterprises HoldingLtd

What Is Brother Enterprises HoldingLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Brother Enterprises HoldingLtd had CN¥1.73b of debt, an increase on CN¥1.56b, over one year. However, because it has a cash reserve of CN¥400.3m, its net debt is less, at about CN¥1.33b.

A Look At Brother Enterprises HoldingLtd's Liabilities

We can see from the most recent balance sheet that Brother Enterprises HoldingLtd had liabilities of CN¥2.52b falling due within a year, and liabilities of CN¥366.3m due beyond that. Offsetting this, it had CN¥400.3m in cash and CN¥635.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.85b.

While this might seem like a lot, it is not so bad since Brother Enterprises HoldingLtd has a market capitalization of CN¥3.83b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Brother Enterprises HoldingLtd will need earnings to service that debt. 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.

In the last year Brother Enterprises HoldingLtd's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Brother Enterprises HoldingLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥140m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥162m of cash over the last year. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Brother Enterprises HoldingLtd (at least 2 which are a bit unpleasant) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.