Red Planet Japan (TYO:3350) Has Debt But No Earnings; Should You Worry?

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.' 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, Red Planet Japan, Inc. (TYO:3350) does carry debt. But the more important question is: how much risk is that debt creating?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Red Planet Japan

What Is Red Planet Japan's Debt?

As you can see below, Red Planet Japan had JP¥3.39b of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has JP¥216.0m in cash leading to net debt of about JP¥3.17b.

How Strong Is Red Planet Japan's Balance Sheet?

According to the last reported balance sheet, Red Planet Japan had liabilities of JP¥1.47b due within 12 months, and liabilities of JP¥12.7b due beyond 12 months. Offsetting this, it had JP¥216.0m in cash and JP¥65.0m in receivables that were due within 12 months. So it has liabilities totalling JP¥13.9b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the JP¥3.55b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Red Planet Japan would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Red Planet Japan 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.

Over 12 months, Red Planet Japan made a loss at the EBIT level, and saw its revenue drop to JP¥784m, which is a fall of 69%. To be frank that doesn't bode well.

Caveat Emptor

While Red Planet Japan's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable JP¥1.8b at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized JP¥811m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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. For example Red Planet Japan has 3 warning signs (and 2 which are a bit concerning) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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