Is Architects Studio Japan (TSE:6085) A Risky Investment?

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. Importantly, Architects Studio Japan Inc. (TSE:6085) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Architects Studio Japan

What Is Architects Studio Japan's Net Debt?

As you can see below, Architects Studio Japan had JP¥247.0m of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds JP¥263.0m in cash, so it actually has JP¥16.0m net cash.

How Healthy Is Architects Studio Japan's Balance Sheet?

According to the last reported balance sheet, Architects Studio Japan had liabilities of JP¥268.0m due within 12 months, and liabilities of JP¥214.0m due beyond 12 months. On the other hand, it had cash of JP¥263.0m and JP¥162.0m worth of receivables due within a year. So its liabilities total JP¥57.0m more than the combination of its cash and short-term receivables.

Given Architects Studio Japan has a market capitalization of JP¥1.58b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Architects Studio Japan boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Architects Studio Japan'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.

In the last year Architects Studio Japan wasn't profitable at an EBIT level, but managed to grow its revenue by 7.1%, to JP¥592m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Architects Studio Japan?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Architects Studio Japan had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of JP¥250m and booked a JP¥361m accounting loss. However, it has net cash of JP¥16.0m, so it has a bit of time before it will need more capital. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. For example Architects Studio Japan has 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.