Is Izu Shaboten ResortLtd (TYO:6819) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Izu Shaboten Resort Co.,Ltd (TYO:6819) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. 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.

Check out our latest analysis for Izu Shaboten ResortLtd

How Much Debt Does Izu Shaboten ResortLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Izu Shaboten ResortLtd had JP¥200.0m of debt, an increase on none, over one year. But on the other hand it also has JP¥867.0m in cash, leading to a JP¥667.0m net cash position.

How Strong Is Izu Shaboten ResortLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Izu Shaboten ResortLtd had liabilities of JP¥315.0m due within 12 months and liabilities of JP¥483.0m due beyond that. On the other hand, it had cash of JP¥867.0m and JP¥69.0m worth of receivables due within a year. So it actually has JP¥138.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Izu Shaboten ResortLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Izu Shaboten ResortLtd boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Izu Shaboten ResortLtd'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, Izu Shaboten ResortLtd made a loss at the EBIT level, and saw its revenue drop to JP¥2.2b, which is a fall of 30%. That makes us nervous, to say the least.

So How Risky Is Izu Shaboten ResortLtd?

Although Izu Shaboten ResortLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of JP¥295m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. To that end, you should be aware of the 1 warning sign we've spotted with Izu Shaboten ResortLtd .

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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