Does Yasue (TYO:1439) Have A Healthy Balance Sheet?

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 Yasue Corporation (TYO:1439) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Yasue

How Much Debt Does Yasue Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Yasue had debt of JP¥1.66b, up from JP¥484.0m in one year. However, it does have JP¥1.44b in cash offsetting this, leading to net debt of about JP¥224.0m.

How Healthy Is Yasue's Balance Sheet?

According to the last reported balance sheet, Yasue had liabilities of JP¥1.72b due within 12 months, and liabilities of JP¥866.0m due beyond 12 months. On the other hand, it had cash of JP¥1.44b and JP¥95.0m worth of receivables due within a year. So its liabilities total JP¥1.05b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of JP¥1.24b, so it does suggest shareholders should keep an eye on Yasue's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is Yasue'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 Yasue had a loss before interest and tax, and actually shrunk its revenue by 15%, to JP¥4.7b. That's not what we would hope to see.

Caveat Emptor

While Yasue's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at JP¥62m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through JP¥220m of cash over the last year. So in short it's a really risky stock. 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. Case in point: We've spotted 5 warning signs for Yasue you should be aware of, and 2 of them are potentially serious.

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. 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.
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