Niraku GC Holdings (HKG:1245) Has A Somewhat Strained Balance Sheet

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 Niraku GC Holdings, Inc. (HKG:1245) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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What Is Niraku GC Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Niraku GC Holdings had debt of JP¥10.6b at the end of September 2022, a reduction from JP¥11.6b over a year. However, it does have JP¥11.5b in cash offsetting this, leading to net cash of JP¥885.0m.

How Strong Is Niraku GC Holdings' Balance Sheet?

According to the last reported balance sheet, Niraku GC Holdings had liabilities of JP¥11.8b due within 12 months, and liabilities of JP¥36.0b due beyond 12 months. Offsetting these obligations, it had cash of JP¥11.5b as well as receivables valued at JP¥107.0m due within 12 months. So its liabilities total JP¥36.2b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the JP¥5.35b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Niraku GC Holdings would likely require a major re-capitalisation if it had to pay its creditors today. Niraku GC Holdings boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

Notably, Niraku GC Holdings made a loss at the EBIT level, last year, but improved that to positive EBIT of JP¥2.4b in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Niraku GC Holdings 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Niraku GC Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Niraku GC Holdings actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Niraku GC Holdings does have more liabilities than liquid assets, it also has net cash of JP¥885.0m. And it impressed us with free cash flow of JP¥4.7b, being 196% of its EBIT. So while Niraku GC Holdings does not have a great balance sheet, it's certainly not too bad. 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 learn about the 3 warning signs we've spotted with Niraku GC Holdings (including 1 which is concerning) .

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.