Is Prored PartnersLTD (TSE:7034) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Prored Partners CO.,LTD. (TSE:7034) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Prored PartnersLTD

How Much Debt Does Prored PartnersLTD Carry?

The image below, which you can click on for greater detail, shows that at January 2024 Prored PartnersLTD had debt of JP¥1.12b, up from JP¥1.04b in one year. However, its balance sheet shows it holds JP¥5.24b in cash, so it actually has JP¥4.12b net cash.

How Strong Is Prored PartnersLTD's Balance Sheet?

According to the last reported balance sheet, Prored PartnersLTD had liabilities of JP¥630.0m due within 12 months, and liabilities of JP¥966.0m due beyond 12 months. Offsetting these obligations, it had cash of JP¥5.24b as well as receivables valued at JP¥458.0m due within 12 months. So it can boast JP¥4.10b more liquid assets than total liabilities.

This surplus strongly suggests that Prored PartnersLTD has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Prored PartnersLTD boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Prored PartnersLTD can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Prored PartnersLTD reported revenue of JP¥2.9b, which is a gain of 14%, 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 Prored PartnersLTD?

While Prored PartnersLTD lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of JP¥938m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. There's no doubt the next few years will be crucial to how the business matures. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Prored PartnersLTD (2 are a bit unpleasant!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.