Is Japan Reliance Service (TYO:4664) A Risky Investment?

Warren Buffett famously said, '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 Japan Reliance Service Corporation (TYO:4664) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Japan Reliance Service

What Is Japan Reliance Service's Debt?

The image below, which you can click on for greater detail, shows that Japan Reliance Service had debt of JP¥461.0m at the end of December 2020, a reduction from JP¥590.0m over a year. But it also has JP¥1.61b in cash to offset that, meaning it has JP¥1.15b net cash.

A Look At Japan Reliance Service's Liabilities

According to the last reported balance sheet, Japan Reliance Service had liabilities of JP¥956.0m due within 12 months, and liabilities of JP¥802.0m due beyond 12 months. Offsetting this, it had JP¥1.61b in cash and JP¥669.0m in receivables that were due within 12 months. So it can boast JP¥521.0m more liquid assets than total liabilities.

It's good to see that Japan Reliance Service has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Japan Reliance Service has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Japan Reliance Service has boosted its EBIT by 83%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Japan Reliance Service will need earnings to service that debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Japan Reliance Service may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Japan Reliance Service actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Japan Reliance Service has net cash of JP¥1.15b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥351m, being 132% of its EBIT. When it comes to Japan Reliance Service's debt, we sufficiently relaxed that our mind turns to the jacuzzi. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Japan Reliance Service has 1 warning sign we think you should be aware of.

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. 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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