Is Musashi (TYO:7521) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Musashi Co., Ltd. (TYO:7521) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Musashi

How Much Debt Does Musashi Carry?

As you can see below, Musashi had JP¥3.52b of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds JP¥18.1b in cash, so it actually has JP¥14.6b net cash.

How Strong Is Musashi's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Musashi had liabilities of JP¥12.2b due within 12 months and liabilities of JP¥1.81b due beyond that. Offsetting these obligations, it had cash of JP¥18.1b as well as receivables valued at JP¥8.48b due within 12 months. So it actually has JP¥12.6b more liquid assets than total liabilities.

This surplus liquidity suggests that Musashi's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Musashi has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Musashi's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Musashi made a loss at the EBIT level, and saw its revenue drop to JP¥31b, which is a fall of 20%. That's not what we would hope to see.

So How Risky Is Musashi?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Musashi had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through JP¥1.0b of cash and made a loss of JP¥185m. Given it only has net cash of JP¥14.6b, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Musashi you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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