Is Yachiyo Industry (TYO:7298) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Yachiyo Industry Co., Ltd. (TYO:7298) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 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. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Yachiyo Industry

What Is Yachiyo Industry's Net Debt?

As you can see below, at the end of December 2020, Yachiyo Industry had JP¥19.6b of debt, up from JP¥18.6b a year ago. Click the image for more detail. But it also has JP¥27.0b in cash to offset that, meaning it has JP¥7.40b net cash.

How Healthy Is Yachiyo Industry's Balance Sheet?

The latest balance sheet data shows that Yachiyo Industry had liabilities of JP¥49.3b due within a year, and liabilities of JP¥17.6b falling due after that. On the other hand, it had cash of JP¥27.0b and JP¥32.6b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥7.29b.

While this might seem like a lot, it is not so bad since Yachiyo Industry has a market capitalization of JP¥14.5b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Yachiyo Industry also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Yachiyo Industry'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.

Over 12 months, Yachiyo Industry made a loss at the EBIT level, and saw its revenue drop to JP¥149b, which is a fall of 6.5%. We would much prefer see growth.

So How Risky Is Yachiyo Industry?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Yachiyo Industry lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of JP¥997m and booked a JP¥3.6b accounting loss. Given it only has net cash of JP¥7.40b, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For instance, we've identified 2 warning signs for Yachiyo Industry (1 is a bit unpleasant) you should be aware of.

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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