Is Ginza Yamagataya (TYO:8215) Using Too Much 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, Ginza Yamagataya Co., Ltd. (TYO:8215) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Ginza Yamagataya

What Is Ginza Yamagataya's Net Debt?

As you can see below, at the end of September 2020, Ginza Yamagataya had JP¥544.0m of debt, up from none a year ago. Click the image for more detail. But it also has JP¥1.22b in cash to offset that, meaning it has JP¥674.0m net cash.

How Healthy Is Ginza Yamagataya's Balance Sheet?

According to the last reported balance sheet, Ginza Yamagataya had liabilities of JP¥735.0m due within 12 months, and liabilities of JP¥1.53b due beyond 12 months. Offsetting this, it had JP¥1.22b in cash and JP¥226.0m in receivables that were due within 12 months. So it has liabilities totalling JP¥824.0m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Ginza Yamagataya is worth JP¥1.58b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Ginza Yamagataya also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Ginza Yamagataya will need earnings to service that debt. 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, Ginza Yamagataya made a loss at the EBIT level, and saw its revenue drop to JP¥3.9b, which is a fall of 28%. To be frank that doesn't bode well.

So How Risky Is Ginza Yamagataya?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Ginza Yamagataya had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of JP¥370m and booked a JP¥815m accounting loss. Given it only has net cash of JP¥674.0m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Like risks, for instance. Every company has them, and we've spotted 2 warning signs for Ginza Yamagataya (of which 1 is significant!) 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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