Does Lihit Lab.Inc (TSE:7975) Have A Healthy Balance Sheet?

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. We note that Lihit Lab.,Inc. (TSE:7975) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Lihit Lab.Inc

What Is Lihit Lab.Inc's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of February 2024 Lihit Lab.Inc had JP¥751.0m of debt, an increase on JP¥445.0m, over one year. However, it does have JP¥1.24b in cash offsetting this, leading to net cash of JP¥491.0m.

How Strong Is Lihit Lab.Inc's Balance Sheet?

We can see from the most recent balance sheet that Lihit Lab.Inc had liabilities of JP¥1.08b falling due within a year, and liabilities of JP¥1.80b due beyond that. Offsetting this, it had JP¥1.24b in cash and JP¥1.73b in receivables that were due within 12 months. So it actually has JP¥95.0m more liquid assets than total liabilities.

This surplus suggests that Lihit Lab.Inc has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Lihit Lab.Inc has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Lihit Lab.Inc'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.

Over 12 months, Lihit Lab.Inc reported revenue of JP¥8.8b, which is a gain of 3.4%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Lihit Lab.Inc?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Lihit Lab.Inc had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through JP¥196m of cash and made a loss of JP¥93m. While this does make the company a bit risky, it's important to remember it has net cash of JP¥491.0m. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Lihit Lab.Inc (of which 2 are a bit unpleasant!) you should know about.

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.