Is G-FactoryLtd (TSE:3474) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies G-Factory Co.,Ltd. (TSE:3474) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for G-FactoryLtd

What Is G-FactoryLtd's Net Debt?

As you can see below, G-FactoryLtd had JP¥1.12b of debt at December 2023, down from JP¥1.29b a year prior. But on the other hand it also has JP¥1.50b in cash, leading to a JP¥381.0m net cash position.

How Strong Is G-FactoryLtd's Balance Sheet?

According to the last reported balance sheet, G-FactoryLtd had liabilities of JP¥934.0m due within 12 months, and liabilities of JP¥1.90b due beyond 12 months. On the other hand, it had cash of JP¥1.50b and JP¥198.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥1.13b.

While this might seem like a lot, it is not so bad since G-FactoryLtd has a market capitalization of JP¥2.69b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, G-FactoryLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since G-FactoryLtd 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, G-FactoryLtd reported revenue of JP¥5.6b, which is a gain of 18%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is G-FactoryLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months G-FactoryLtd lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of JP¥398m and booked a JP¥194m accounting loss. With only JP¥381.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example G-FactoryLtd has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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. 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.