Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Karula Co.,Ltd. (TYO:2789) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
View our latest analysis for KarulaLtd
What Is KarulaLtd's Net Debt?
As you can see below, at the end of November 2020, KarulaLtd had JP¥3.09b of debt, up from JP¥1.91b a year ago. Click the image for more detail. However, it does have JP¥995.0m in cash offsetting this, leading to net debt of about JP¥2.09b.
A Look At KarulaLtd's Liabilities
Zooming in on the latest balance sheet data, we can see that KarulaLtd had liabilities of JP¥1.54b due within 12 months and liabilities of JP¥2.22b due beyond that. Offsetting these obligations, it had cash of JP¥995.0m as well as receivables valued at JP¥73.0m due within 12 months. So its liabilities total JP¥2.70b more than the combination of its cash and short-term receivables.
When you consider that this deficiency exceeds the company's JP¥2.69b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is KarulaLtd'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.
Over 12 months, KarulaLtd made a loss at the EBIT level, and saw its revenue drop to JP¥5.9b, which is a fall of 24%. That makes us nervous, to say the least.
Caveat Emptor
Not only did KarulaLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping JP¥438m. Considering that alongside the liabilities mentioned above make us nervous 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¥573m in negative free cash flow over the last year. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with KarulaLtd (including 1 which is concerning) .
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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About TSE:2789
Good value with proven track record.
