Life Intelligent Enterprise HoldingsLtd (TSE:5856) Has Debt But No Earnings; Should You Worry?

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 note that Life Intelligent Enterprise Holdings Co.,Ltd. (TSE:5856) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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, 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. The first step when considering a company's debt levels is to consider its cash and debt 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 Life Intelligent Enterprise HoldingsLtd had JP¥1.72b of debt in June 2024, down from JP¥1.93b, one year before. However, because it has a cash reserve of JP¥360.0m, its net debt is less, at about JP¥1.36b.

How Strong 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¥3.12b falling due within a year, and liabilities of JP¥1.28b due beyond that. Offsetting this, it had JP¥360.0m in cash and JP¥1.28b in receivables that were due within 12 months. So its liabilities total JP¥2.76b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of JP¥2.70b, we think shareholders really should watch Life Intelligent Enterprise HoldingsLtd's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But it is Life Intelligent Enterprise HoldingsLtd'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, Life Intelligent Enterprise HoldingsLtd reported revenue of JP¥19b, which is a gain of 5.0%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Life Intelligent Enterprise HoldingsLtd had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping JP¥1.5b. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through JP¥1.3b in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. 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 3 which shouldn't be ignored) , and understanding them should be part of your investment process.

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.