Yamada Servicer Synthetic OfficeLtd (TYO:4351) Is Making Moderate Use Of Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Yamada Servicer Synthetic Office Co.,Ltd (TYO:4351) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Yamada Servicer Synthetic OfficeLtd

How Much Debt Does Yamada Servicer Synthetic OfficeLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Yamada Servicer Synthetic OfficeLtd had JP¥1.90b of debt, an increase on JP¥1.09b, over one year. On the flip side, it has JP¥1.26b in cash leading to net debt of about JP¥644.0m.

How Healthy Is Yamada Servicer Synthetic OfficeLtd's Balance Sheet?

We can see from the most recent balance sheet that Yamada Servicer Synthetic OfficeLtd had liabilities of JP¥2.07b falling due within a year, and liabilities of JP¥959.0m due beyond that. Offsetting this, it had JP¥1.26b in cash and JP¥3.12b in receivables that were due within 12 months. So it can boast JP¥1.35b more liquid assets than total liabilities.

This surplus strongly suggests that Yamada Servicer Synthetic OfficeLtd has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Yamada Servicer Synthetic OfficeLtd'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, Yamada Servicer Synthetic OfficeLtd made a loss at the EBIT level, and saw its revenue drop to JP¥1.8b, which is a fall of 16%. That's not what we would hope to see.

Caveat Emptor

While Yamada Servicer Synthetic OfficeLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping JP¥362m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. So it seems too risky for our taste. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Yamada Servicer Synthetic OfficeLtd (2 are significant!) that you should be aware of before investing here.

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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