Does AINAVO HOLDINGSLtd (TYO:7539) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies AINAVO HOLDINGS Co.,Ltd. (TYO:7539) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for AINAVO HOLDINGSLtd

What Is AINAVO HOLDINGSLtd's Net Debt?

As you can see below, AINAVO HOLDINGSLtd had JP¥388.0m of debt at December 2020, down from JP¥798.0m a year prior. But on the other hand it also has JP¥11.0b in cash, leading to a JP¥10.6b net cash position.

A Look At AINAVO HOLDINGSLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that AINAVO HOLDINGSLtd had liabilities of JP¥13.1b due within 12 months and liabilities of JP¥1.33b due beyond that. On the other hand, it had cash of JP¥11.0b and JP¥11.6b worth of receivables due within a year. So it can boast JP¥8.13b more liquid assets than total liabilities.

This surplus strongly suggests that AINAVO HOLDINGSLtd 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. Simply put, the fact that AINAVO HOLDINGSLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that AINAVO HOLDINGSLtd has seen its EBIT plunge 14% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is AINAVO HOLDINGSLtd'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While AINAVO HOLDINGSLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, AINAVO HOLDINGSLtd produced sturdy free cash flow equating to 64% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case AINAVO HOLDINGSLtd has JP¥10.6b in net cash and a decent-looking balance sheet. So is AINAVO HOLDINGSLtd's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. 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 1 warning sign for AINAVO HOLDINGSLtd you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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