We Think CrossforLtd (TYO:7810) Has A Fair Chunk Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, Crossfor Co.,Ltd. (TYO:7810) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for CrossforLtd

How Much Debt Does CrossforLtd Carry?

As you can see below, at the end of January 2021, CrossforLtd had JP¥2.74b of debt, up from JP¥2.49b a year ago. Click the image for more detail. On the flip side, it has JP¥924.0m in cash leading to net debt of about JP¥1.82b.

A Look At CrossforLtd's Liabilities

The latest balance sheet data shows that CrossforLtd had liabilities of JP¥1.50b due within a year, and liabilities of JP¥1.44b falling due after that. Offsetting these obligations, it had cash of JP¥924.0m as well as receivables valued at JP¥360.0m due within 12 months. So its liabilities total JP¥1.66b more than the combination of its cash and short-term receivables.

CrossforLtd has a market capitalization of JP¥4.66b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since CrossforLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year CrossforLtd had a loss before interest and tax, and actually shrunk its revenue by 37%, to JP¥2.0b. That makes us nervous, to say the least.

Caveat Emptor

Not only did CrossforLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable JP¥645m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled JP¥257m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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 2 warning signs for CrossforLtd (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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