CAREER BANK (SPSE:4834) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies CAREER BANK Co., Ltd. (SPSE:4834) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for CAREER BANK

What Is CAREER BANK's Net Debt?

As you can see below, at the end of November 2020, CAREER BANK had JP¥1.15b of debt, up from JP¥950.0m a year ago. Click the image for more detail. However, it does have JP¥1.34b in cash offsetting this, leading to net cash of JP¥194.0m.

A Look At CAREER BANK's Liabilities

The latest balance sheet data shows that CAREER BANK had liabilities of JP¥1.60b due within a year, and liabilities of JP¥172.0m falling due after that. On the other hand, it had cash of JP¥1.34b and JP¥963.0m worth of receivables due within a year. So it can boast JP¥535.0m more liquid assets than total liabilities.

This surplus strongly suggests that CAREER BANK has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, CAREER BANK boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for CAREER BANK if management cannot prevent a repeat of the 68% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since CAREER BANK 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, a company can only pay off debt with cold hard cash, not accounting profits. CAREER BANK 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. In the last three years, CAREER BANK's free cash flow amounted to 34% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case CAREER BANK has JP¥194.0m in net cash and a decent-looking balance sheet. So we are not troubled with CAREER BANK's debt use. 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. For example CAREER BANK has 3 warning signs (and 2 which don't sit too well with us) we think 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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