Is Life Intelligent Enterprise HoldingsLtd (TSE:5856) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Life Intelligent Enterprise Holdings Co.,Ltd. (TSE:5856) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Life Intelligent Enterprise HoldingsLtd

What Is Life Intelligent Enterprise HoldingsLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Life Intelligent Enterprise HoldingsLtd had JP¥1.83b of debt, an increase on JP¥891.0m, over one year. However, it also had JP¥500.0m in cash, and so its net debt is JP¥1.33b.

How Healthy Is Life Intelligent Enterprise HoldingsLtd's Balance Sheet?

According to the last reported balance sheet, Life Intelligent Enterprise HoldingsLtd had liabilities of JP¥3.21b due within 12 months, and liabilities of JP¥1.18b due beyond 12 months. Offsetting these obligations, it had cash of JP¥500.0m as well as receivables valued at JP¥1.29b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥2.60b.

This is a mountain of leverage relative to its market capitalization of JP¥2.70b. 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 you can't view debt in total isolation; since Life Intelligent Enterprise HoldingsLtd 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.

In the last year Life Intelligent Enterprise HoldingsLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 6.2%, to JP¥19b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Life Intelligent Enterprise HoldingsLtd produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping JP¥1.5b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through JP¥1.3b of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Life Intelligent Enterprise HoldingsLtd (at least 2 which are significant) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

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