We Think Japan Reliance Service (TYO:4664) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Japan Reliance Service Corporation (TYO:4664) makes use of debt. But is this debt a concern to shareholders?

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Japan Reliance Service

What Is Japan Reliance Service's Debt?

As you can see below, at the end of September 2020, Japan Reliance Service had JP¥461.0m of debt, up from JP¥440.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds JP¥1.59b in cash, so it actually has JP¥1.13b net cash.

How Strong Is Japan Reliance Service's Balance Sheet?

We can see from the most recent balance sheet that Japan Reliance Service had liabilities of JP¥1.05b falling due within a year, and liabilities of JP¥820.0m due beyond that. Offsetting this, it had JP¥1.59b in cash and JP¥748.0m in receivables that were due within 12 months. So it can boast JP¥469.0m 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. Succinctly put, Japan Reliance Service boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Japan Reliance Service has boosted its EBIT by 35%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Japan Reliance Service'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Japan Reliance Service has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. 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¥1.13b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥351m, being 112% 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Japan Reliance Service 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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