Is AINAVO HOLDINGSLtd (TSE:7539) A Risky Investment?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that AINAVO HOLDINGS Co.,Ltd. (TSE:7539) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for AINAVO HOLDINGSLtd

What Is AINAVO HOLDINGSLtd's Debt?

As you can see below, AINAVO HOLDINGSLtd had JP¥811.0m of debt at June 2024, down from JP¥970.0m a year prior. But it also has JP¥11.2b in cash to offset that, meaning it has JP¥10.4b net cash.

A Look At AINAVO HOLDINGSLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that AINAVO HOLDINGSLtd had liabilities of JP¥18.0b due within 12 months and liabilities of JP¥1.55b due beyond that. Offsetting this, it had JP¥11.2b in cash and JP¥14.3b in receivables that were due within 12 months. So it can boast JP¥5.97b more liquid assets than total liabilities.

This surplus liquidity suggests that AINAVO HOLDINGSLtd's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, AINAVO HOLDINGSLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that AINAVO HOLDINGSLtd saw its EBIT decline by 6.8% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But it is AINAVO HOLDINGSLtd'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While AINAVO HOLDINGSLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, AINAVO HOLDINGSLtd produced sturdy free cash flow equating to 54% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case AINAVO HOLDINGSLtd has JP¥10.4b in net cash and a decent-looking balance sheet. So is AINAVO HOLDINGSLtd's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for AINAVO HOLDINGSLtd (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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.