Is Life Intelligent Enterprise HoldingsLtd (TSE:5856) 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Life Intelligent Enterprise Holdings Co.,Ltd. (TSE:5856) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Life Intelligent Enterprise HoldingsLtd Carry?

As you can see below, Life Intelligent Enterprise HoldingsLtd had JP¥1.50b of debt at December 2024, down from JP¥1.90b a year prior. But on the other hand it also has JP¥2.28b in cash, leading to a JP¥788.0m net cash position.

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

We can see from the most recent balance sheet that Life Intelligent Enterprise HoldingsLtd had liabilities of JP¥2.72b falling due within a year, and liabilities of JP¥1.76b due beyond that. Offsetting these obligations, it had cash of JP¥2.28b as well as receivables valued at JP¥1.73b due within 12 months. So it has liabilities totalling JP¥474.0m more than its cash and near-term receivables, combined.

Of course, Life Intelligent Enterprise HoldingsLtd has a market capitalization of JP¥4.59b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Life Intelligent Enterprise HoldingsLtd 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 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 .

Check out our latest analysis for Life Intelligent Enterprise HoldingsLtd

In the last year Life Intelligent Enterprise HoldingsLtd had a loss before interest and tax, and actually shrunk its revenue by 30%, to JP¥13b. That makes us nervous, to say the least.

So How Risky Is Life Intelligent Enterprise HoldingsLtd?

While Life Intelligent Enterprise HoldingsLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of JP¥646m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Life Intelligent Enterprise HoldingsLtd has 4 warning signs (and 2 which don't sit too well with us) we think 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.