Would Daidoh (TSE:3205) Be Better Off With Less Debt?

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. We note that Daidoh Limited (TSE:3205) does have debt on its balance sheet. But is this debt a concern to shareholders?

We've discovered 5 warning signs about Daidoh. View them for free.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

How Much Debt Does Daidoh Carry?

As you can see below, at the end of December 2024, Daidoh had JP¥12.8b of debt, up from JP¥12.3b a year ago. Click the image for more detail. However, it does have JP¥4.08b in cash offsetting this, leading to net debt of about JP¥8.71b.

How Healthy Is Daidoh's Balance Sheet?

We can see from the most recent balance sheet that Daidoh had liabilities of JP¥12.8b falling due within a year, and liabilities of JP¥12.1b due beyond that. Offsetting these obligations, it had cash of JP¥4.08b as well as receivables valued at JP¥2.67b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥18.1b.

This deficit is considerable relative to its market capitalization of JP¥24.9b, so it does suggest shareholders should keep an eye on Daidoh's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is Daidoh'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.

Check out our latest analysis for Daidoh

Over 12 months, Daidoh made a loss at the EBIT level, and saw its revenue drop to JP¥28b, which is a fall of 2.9%. We would much prefer see growth.

Caveat Emptor

Importantly, Daidoh had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost JP¥408m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled JP¥8.3b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. Be aware that Daidoh is showing 5 warning signs in our investment analysis , and 1 of those is potentially serious...

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.