Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Asakuma Co.,Ltd (TYO:7678) 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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for AsakumaLtd
What Is AsakumaLtd's Debt?
As you can see below, at the end of December 2020, AsakumaLtd had JP¥759.0m of debt, up from none a year ago. Click the image for more detail. However, it does have JP¥2.01b in cash offsetting this, leading to net cash of JP¥1.25b.
A Look At AsakumaLtd's Liabilities
We can see from the most recent balance sheet that AsakumaLtd had liabilities of JP¥1.47b falling due within a year, and liabilities of JP¥636.0m due beyond that. Offsetting this, it had JP¥2.01b in cash and JP¥396.0m in receivables that were due within 12 months. So it can boast JP¥303.0m more liquid assets than total liabilities.
This short term liquidity is a sign that AsakumaLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that AsakumaLtd has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is AsakumaLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year AsakumaLtd had a loss before interest and tax, and actually shrunk its revenue by 25%, to JP¥7.0b. To be frank that doesn't bode well.
So How Risky Is AsakumaLtd?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months AsakumaLtd lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through JP¥711m of cash and made a loss of JP¥882m. With only JP¥1.25b on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 AsakumaLtd (of which 1 is potentially serious!) 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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About TSE:7678
AsakumaLtd
Together with its subsidiary Asakuma Succession Co., Ltd., engages in the restaurant management and franchise business in Japan.
Excellent balance sheet with questionable track record.
