Does IBOKINLtd (TYO:5699) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, IBOKIN Co.,Ltd. (TYO:5699) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

Check out our latest analysis for IBOKINLtd

What Is IBOKINLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 IBOKINLtd had debt of JP¥618.0m, up from JP¥575.0m in one year. However, it does have JP¥1.27b in cash offsetting this, leading to net cash of JP¥651.0m.

How Strong Is IBOKINLtd's Balance Sheet?

According to the last reported balance sheet, IBOKINLtd had liabilities of JP¥1.33b due within 12 months, and liabilities of JP¥582.0m due beyond 12 months. On the other hand, it had cash of JP¥1.27b and JP¥603.0m worth of receivables due within a year. So its liabilities total JP¥44.0m more than the combination of its cash and short-term receivables.

Having regard to IBOKINLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the JP¥3.48b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, IBOKINLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the bad news is that IBOKINLtd has seen its EBIT plunge 11% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But it is IBOKINLtd'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. IBOKINLtd 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. During the last three years, IBOKINLtd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that IBOKINLtd has JP¥651.0m in net cash. So we don't have any problem with IBOKINLtd's use of debt. 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. To that end, you should learn about the 3 warning signs we've spotted with IBOKINLtd (including 1 which is is significant) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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