David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that CAREER BANK Co., Ltd. (SPSE:4834) does use debt in its business. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for CAREER BANK
What Is CAREER BANK's Net Debt?
As you can see below, at the end of August 2020, CAREER BANK had JPÂ¥1.15b of debt, up from JPÂ¥850.0m a year ago. Click the image for more detail. But on the other hand it also has JPÂ¥1.59b in cash, leading to a JPÂ¥443.0m net cash position.
How Healthy Is CAREER BANK's Balance Sheet?
We can see from the most recent balance sheet that CAREER BANK had liabilities of JPÂ¥1.32b falling due within a year, and liabilities of JPÂ¥374.0m due beyond that. Offsetting this, it had JPÂ¥1.59b in cash and JPÂ¥788.0m in receivables that were due within 12 months. So it can boast JPÂ¥689.0m more liquid assets than total liabilities.
This surplus liquidity suggests that CAREER BANK's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Simply put, the fact that CAREER BANK has more cash than debt is arguably a good indication that it can manage its debt safely.
It is just as well that CAREER BANK's load is not too heavy, because its EBIT was down 53% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is CAREER BANK'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 CAREER BANK 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, CAREER BANK actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that CAREER BANK has net cash of JPÂ¥443.0m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JPÂ¥192m, being 110% of its EBIT. So we don't think CAREER BANK's use of debt is risky. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with CAREER BANK , and understanding them should be part of your investment process.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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 SPSE:4834
CAREER BANK
Primarily engages in the dispatching of general workers business.
Excellent balance sheet second-rate dividend payer.
