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

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.' 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. Importantly, Brother Enterprises Holding Co.,Ltd. (SZSE:002562) does carry debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Brother Enterprises HoldingLtd

What Is Brother Enterprises HoldingLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Brother Enterprises HoldingLtd had CN¥1.69b of debt, an increase on CN¥1.61b, over one year. However, it does have CN¥295.5m in cash offsetting this, leading to net debt of about CN¥1.39b.

How Strong Is Brother Enterprises HoldingLtd's Balance Sheet?

According to the last reported balance sheet, Brother Enterprises HoldingLtd had liabilities of CN¥2.46b due within 12 months, and liabilities of CN¥324.6m due beyond 12 months. Offsetting these obligations, it had cash of CN¥295.5m as well as receivables valued at CN¥546.7m due within 12 months. So its liabilities total CN¥1.94b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Brother Enterprises HoldingLtd has a market capitalization of CN¥4.25b, 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. There's no doubt that we learn most about debt from the balance sheet. But it is Brother Enterprises HoldingLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Brother Enterprises HoldingLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to CN¥3.3b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Brother Enterprises HoldingLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥37m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥79m of cash over the last year. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Brother Enterprises HoldingLtd .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.