Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Printnet Inc. (TYO:7805) makes use of debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Printnet
How Much Debt Does Printnet Carry?
As you can see below, Printnet had JP¥2.55b of debt at January 2021, down from JP¥2.79b a year prior. On the flip side, it has JP¥1.20b in cash leading to net debt of about JP¥1.35b.
How Healthy Is Printnet's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Printnet had liabilities of JP¥2.00b due within 12 months and liabilities of JP¥2.10b due beyond that. Offsetting these obligations, it had cash of JP¥1.20b as well as receivables valued at JP¥599.0m due within 12 months. So its liabilities total JP¥2.31b more than the combination of its cash and short-term receivables.
This is a mountain of leverage relative to its market capitalization of JP¥2.72b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is Printnet'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, Printnet made a loss at the EBIT level, and saw its revenue drop to JP¥7.8b, which is a fall of 6.6%. We would much prefer see growth.
Caveat Emptor
Over the last twelve months Printnet produced an earnings before interest and tax (EBIT) loss. Indeed, it lost JP¥87m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of JP¥116m. In the meantime, we consider the stock very risky. 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. To that end, you should learn about the 3 warning signs we've spotted with Printnet (including 1 which can't be ignored) .
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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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About TSE:7805
Flawless balance sheet low.
