Does HamayuuLtd (TYO:7682) Have A Healthy Balance Sheet?

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.' 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. We can see that Hamayuu Co.,Ltd. (TYO:7682) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for HamayuuLtd

How Much Debt Does HamayuuLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of January 2021 HamayuuLtd had JP¥2.00b of debt, an increase on JP¥1.06b, over one year. However, it also had JP¥1.74b in cash, and so its net debt is JP¥256.0m.

How Healthy Is HamayuuLtd's Balance Sheet?

We can see from the most recent balance sheet that HamayuuLtd had liabilities of JP¥1.07b falling due within a year, and liabilities of JP¥1.96b due beyond that. Offsetting these obligations, it had cash of JP¥1.74b as well as receivables valued at JP¥165.0m due within 12 months. So its liabilities total JP¥1.12b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since HamayuuLtd has a market capitalization of JP¥2.99b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 HamayuuLtd 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, HamayuuLtd made a loss at the EBIT level, and saw its revenue drop to JP¥4.2b, which is a fall of 18%. That's not what we would hope to see.

Caveat Emptor

Not only did HamayuuLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at JP¥260m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through JP¥335m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example HamayuuLtd has 3 warning signs (and 2 which are a bit unpleasant) 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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