Origin Company (TSE:6513) Has Debt But No Earnings; Should You Worry?

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.' 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 Origin Company, Limited (TSE:6513) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Origin Company

What Is Origin Company's Net Debt?

As you can see below, at the end of March 2024, Origin Company had JP¥2.41b of debt, up from JP¥467.0m a year ago. Click the image for more detail. But on the other hand it also has JP¥9.90b in cash, leading to a JP¥7.49b net cash position.

How Healthy Is Origin Company's Balance Sheet?

According to the last reported balance sheet, Origin Company had liabilities of JP¥10.5b due within 12 months, and liabilities of JP¥10.7b due beyond 12 months. Offsetting this, it had JP¥9.90b in cash and JP¥10.3b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥982.0m.

Given Origin Company has a market capitalization of JP¥6.09b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Origin Company 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 Origin Company'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, Origin Company made a loss at the EBIT level, and saw its revenue drop to JP¥28b, which is a fall of 12%. That's not what we would hope to see.

So How Risky Is Origin Company?

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 Origin Company had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through JP¥693m of cash and made a loss of JP¥1.5b. With only JP¥7.49b on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. For example, we've discovered 3 warning signs for Origin Company (2 can't be ignored!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com