Is Prored PartnersLTD (TSE:7034) Using Debt In A Risky Way?

Warren Buffett famously said, '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. We note that Prored Partners CO.,LTD. (TSE:7034) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

How Much Debt Does Prored PartnersLTD Carry?

The image below, which you can click on for greater detail, shows that Prored PartnersLTD had debt of JP¥941.0m at the end of January 2025, a reduction from JP¥1.12b over a year. However, its balance sheet shows it holds JP¥4.83b in cash, so it actually has JP¥3.89b net cash.

How Strong Is Prored PartnersLTD's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Prored PartnersLTD had liabilities of JP¥853.0m due within 12 months and liabilities of JP¥803.0m due beyond that. On the other hand, it had cash of JP¥4.83b and JP¥583.0m worth of receivables due within a year. So it can boast JP¥3.76b more liquid assets than total liabilities.

This luscious liquidity implies that Prored PartnersLTD's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Prored PartnersLTD has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Prored PartnersLTD 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.

See our latest analysis for Prored PartnersLTD

In the last year Prored PartnersLTD wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to JP¥3.4b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Prored PartnersLTD?

Although Prored PartnersLTD had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of JP¥163m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. There's no doubt the next few years will be crucial to how the business matures. 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. For example Prored PartnersLTD has 3 warning signs (and 1 which doesn't sit too well with us) 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.