Does Flying Garden (TYO:3317) Have A Healthy Balance Sheet?

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 Flying Garden Co., Ltd. (TYO:3317) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. 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.

See our latest analysis for Flying Garden

How Much Debt Does Flying Garden Carry?

As you can see below, at the end of September 2020, Flying Garden had JP¥517.0m of debt, up from JP¥167.0m a year ago. Click the image for more detail. But it also has JP¥724.0m in cash to offset that, meaning it has JP¥207.0m net cash.

A Look At Flying Garden's Liabilities

According to the last reported balance sheet, Flying Garden had liabilities of JP¥1.12b due within 12 months, and liabilities of JP¥479.0m due beyond 12 months. Offsetting these obligations, it had cash of JP¥724.0m as well as receivables valued at JP¥100.0m due within 12 months. So it has liabilities totalling JP¥772.0m more than its cash and near-term receivables, combined.

Flying Garden has a market capitalization of JP¥2.31b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Flying Garden also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Flying Garden 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 Flying Garden had a loss before interest and tax, and actually shrunk its revenue by 15%, to JP¥6.1b. That's not what we would hope to see.

So How Risky Is Flying Garden?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Flying Garden lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of JP¥188m and booked a JP¥100m accounting loss. With only JP¥207.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Flying Garden you should be aware of, and 1 of them shouldn't be ignored.

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.

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