Is Ogura ClutchLtd (TYO:6408) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Ogura Clutch Co.,Ltd. (TYO:6408) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Ogura ClutchLtd

What Is Ogura ClutchLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Ogura ClutchLtd had debt of JP¥13.2b, up from JP¥12.6b in one year. However, it also had JP¥6.08b in cash, and so its net debt is JP¥7.17b.

How Strong Is Ogura ClutchLtd's Balance Sheet?

According to the last reported balance sheet, Ogura ClutchLtd had liabilities of JP¥17.5b due within 12 months, and liabilities of JP¥5.37b due beyond 12 months. On the other hand, it had cash of JP¥6.08b and JP¥8.41b worth of receivables due within a year. So its liabilities total JP¥8.39b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the JP¥3.49b 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, Ogura ClutchLtd would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is Ogura ClutchLtd's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Ogura ClutchLtd made a loss at the EBIT level, and saw its revenue drop to JP¥35b, which is a fall of 16%. We would much prefer see growth.

Caveat Emptor

Not only did Ogura ClutchLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable JP¥397m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through JP¥117m in negative free cash flow over the last year. That means it's on the risky side of things. 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. Case in point: We've spotted 4 warning signs for Ogura ClutchLtd you should be aware of, and 2 of them shouldn't be ignored.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. 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.
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