Is Ginza Yamagataya (TYO:8215) Weighed On By Its Debt Load?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Ginza Yamagataya Co., Ltd. (TYO:8215) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. 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.

See our latest analysis for Ginza Yamagataya

How Much Debt Does Ginza Yamagataya Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Ginza Yamagataya had JP¥584.0m of debt, an increase on none, over one year. But on the other hand it also has JP¥1.39b in cash, leading to a JP¥805.0m net cash position.

How Strong Is Ginza Yamagataya's Balance Sheet?

According to the last reported balance sheet, Ginza Yamagataya had liabilities of JP¥841.0m due within 12 months, and liabilities of JP¥1.53b due beyond 12 months. Offsetting these obligations, it had cash of JP¥1.39b as well as receivables valued at JP¥383.0m due within 12 months. So its liabilities total JP¥595.0m more than the combination of its cash and short-term receivables.

Ginza Yamagataya has a market capitalization of JP¥1.53b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Ginza Yamagataya boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Ginza Yamagataya's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Ginza Yamagataya made a loss at the EBIT level, and saw its revenue drop to JP¥3.6b, which is a fall of 32%. 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 the fact is that over the last twelve months Ginza Yamagataya lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of JP¥370m and booked a JP¥868m accounting loss. With only JP¥805.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For instance, we've identified 2 warning signs for Ginza Yamagataya (1 is a bit concerning) you should be aware of.

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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