Endo Manufacturing (TYO:7841) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Endo Manufacturing Co., Ltd. (TYO:7841) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Endo Manufacturing

How Much Debt Does Endo Manufacturing Carry?

You can click the graphic below for the historical numbers, but it shows that Endo Manufacturing had JP¥700.0m of debt in December 2020, down from JP¥800.0m, one year before. However, it does have JP¥6.44b in cash offsetting this, leading to net cash of JP¥5.74b.

How Strong Is Endo Manufacturing's Balance Sheet?

The latest balance sheet data shows that Endo Manufacturing had liabilities of JP¥1.46b due within a year, and liabilities of JP¥1.27b falling due after that. Offsetting these obligations, it had cash of JP¥6.44b as well as receivables valued at JP¥2.13b due within 12 months. So it can boast JP¥5.84b more liquid assets than total liabilities.

This surplus strongly suggests that Endo Manufacturing has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Endo Manufacturing 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 it is Endo Manufacturing'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 Endo Manufacturing had a loss before interest and tax, and actually shrunk its revenue by 15%, to JP¥8.3b. That's not what we would hope to see.

So How Risky Is Endo Manufacturing?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Endo Manufacturing had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through JP¥159m of cash and made a loss of JP¥88m. With only JP¥5.74b on the balance sheet, it would appear that its going to need to raise capital again soon. 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Endo Manufacturing has 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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