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.' 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. We can see that JAPAN Creative Platform Group Co., Ltd. (TYO:7814) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is JAPAN Creative Platform Group's Net Debt?
The image below, which you can click on for greater detail, shows that at December 2020 JAPAN Creative Platform Group had debt of JP¥38.3b, up from JP¥29.5b in one year. However, it does have JP¥14.5b in cash offsetting this, leading to net debt of about JP¥23.8b.
How Healthy Is JAPAN Creative Platform Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that JAPAN Creative Platform Group had liabilities of JP¥40.3b due within 12 months and liabilities of JP¥9.15b due beyond that. On the other hand, it had cash of JP¥14.5b and JP¥13.7b worth of receivables due within a year. So it has liabilities totalling JP¥21.2b more than its cash and near-term receivables, combined.
Given this deficit is actually higher than the company's market capitalization of JP¥16.6b, we think shareholders really should watch JAPAN Creative Platform Group's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since JAPAN Creative Platform Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, JAPAN Creative Platform Group made a loss at the EBIT level, and saw its revenue drop to JP¥51b, which is a fall of 8.2%. We would much prefer see growth.
Over the last twelve months JAPAN Creative Platform Group produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at JP¥519m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. But on the bright side the company actually produced a statutory profit of JP¥17m and free cash flow of JP¥1.4b. So one might argue that there's still a chance it can get things on the right track. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for JAPAN Creative Platform Group (of which 1 is significant!) you should know about.
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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