These 4 Measures Indicate That Niraku GC Holdings (HKG:1245) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Niraku GC Holdings, Inc. (HKG:1245) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Niraku GC Holdings

How Much Debt Does Niraku GC Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Niraku GC Holdings had JP¥10.2b of debt in March 2023, down from JP¥11.7b, one year before. But on the other hand it also has JP¥11.1b in cash, leading to a JP¥851.0m net cash position.

How Strong Is Niraku GC Holdings' Balance Sheet?

We can see from the most recent balance sheet that Niraku GC Holdings had liabilities of JP¥11.6b falling due within a year, and liabilities of JP¥34.9b due beyond that. On the other hand, it had cash of JP¥11.1b and JP¥350.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥35.1b.

The deficiency here weighs heavily on the JP¥5.91b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Niraku GC Holdings would probably need a major re-capitalization if its creditors were to demand repayment. Given that Niraku GC Holdings has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

Notably, Niraku GC Holdings's EBIT launched higher than Elon Musk, gaining a whopping 114% on last year. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Niraku GC Holdings'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Niraku GC Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Niraku GC Holdings actually produced more free cash flow than EBIT over the last two years. 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¥851.0m. And it impressed us with free cash flow of JP¥4.9b, being 237% of its EBIT. So we are not troubled with Niraku GC Holdings's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with Niraku GC Holdings .

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.