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.' 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 note that Phil Company,Inc. (TSE:3267) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Phil CompanyInc
What Is Phil CompanyInc's Debt?
As you can see below, at the end of May 2024, Phil CompanyInc had JP¥1.99b of debt, up from JP¥589.0m a year ago. Click the image for more detail. But on the other hand it also has JP¥2.91b in cash, leading to a JP¥926.0m net cash position.
A Look At Phil CompanyInc's Liabilities
According to the last reported balance sheet, Phil CompanyInc had liabilities of JP¥2.74b due within 12 months, and liabilities of JP¥1.72b due beyond 12 months. On the other hand, it had cash of JP¥2.91b and JP¥61.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥1.49b.
While this might seem like a lot, it is not so bad since Phil CompanyInc has a market capitalization of JP¥3.26b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Phil CompanyInc also has more cash than debt, so we're pretty confident it can manage its debt safely.
We saw Phil CompanyInc grow its EBIT by 3.7% in the last twelve months. Whilst that hardly knocks our socks off it is a positive when it comes to debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Phil CompanyInc 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Phil CompanyInc 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. During the last three years, Phil CompanyInc burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
Summing Up
While Phil CompanyInc does have more liabilities than liquid assets, it also has net cash of JP¥926.0m. On top of that, it increased its EBIT by 3.7% in the last twelve months. So although we see some areas for improvement, we're not too worried about Phil CompanyInc's balance sheet. 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. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Phil CompanyInc (of which 3 make us uncomfortable!) you should know about.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
About TSE:3267
Moderate with adequate balance sheet.
