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.' 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, Ginza Renoir Co., Ltd. (TYO:9853) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Ginza Renoir
What Is Ginza Renoir's Debt?
The image below, which you can click on for greater detail, shows that at September 2020 Ginza Renoir had debt of JP¥1.50b, up from JP¥80.0m in one year. However, its balance sheet shows it holds JP¥2.04b in cash, so it actually has JP¥540.0m net cash.
How Healthy Is Ginza Renoir's Balance Sheet?
We can see from the most recent balance sheet that Ginza Renoir had liabilities of JP¥1.86b falling due within a year, and liabilities of JP¥298.0m due beyond that. On the other hand, it had cash of JP¥2.04b and JP¥83.0m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.
This state of affairs indicates that Ginza Renoir's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the JP¥4.96b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Ginza Renoir 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 you can't view debt in total isolation; since Ginza Renoir 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 Ginza Renoir had a loss before interest and tax, and actually shrunk its revenue by 29%, to JP¥5.8b. That makes us nervous, to say the least.
So How Risky Is Ginza Renoir?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Ginza Renoir had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of JP¥1.5b and booked a JP¥1.4b accounting loss. With only JP¥540.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Ginza Renoir (at least 1 which can't be ignored) , and understanding them should be part of your investment process.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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:9853
Excellent balance sheet and overvalued.