Is JFLA Holdings (TYO:3069) Using Debt In A Risky Way?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, JFLA Holdings Inc. (TYO:3069) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for JFLA Holdings

What Is JFLA Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that JFLA Holdings had JP¥26.1b of debt in September 2020, down from JP¥29.9b, one year before. On the flip side, it has JP¥5.71b in cash leading to net debt of about JP¥20.4b.

A Look At JFLA Holdings' Liabilities

According to the last reported balance sheet, JFLA Holdings had liabilities of JP¥27.8b due within 12 months, and liabilities of JP¥15.8b due beyond 12 months. On the other hand, it had cash of JP¥5.71b and JP¥8.83b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥29.1b.

This deficit casts a shadow over the JP¥15.5b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, JFLA Holdings would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since JFLA Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year JFLA Holdings had a loss before interest and tax, and actually shrunk its revenue by 9.0%, to JP¥74b. We would much prefer see growth.

Caveat Emptor

Importantly, JFLA Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost JP¥987m at the EBIT level. 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¥1.2b in negative free cash flow over the last year. That means it's on the risky side of things. 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 JFLA Holdings you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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.
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