Is Resorttrust (TSE:4681) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies Resorttrust, Inc. (TSE:4681) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Resorttrust

What Is Resorttrust's Net Debt?

The image below, which you can click on for greater detail, shows that Resorttrust had debt of JP¥12.6b at the end of March 2024, a reduction from JP¥26.1b over a year. However, it does have JP¥40.5b in cash offsetting this, leading to net cash of JP¥27.9b.

How Healthy Is Resorttrust's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Resorttrust had liabilities of JP¥177.9b due within 12 months and liabilities of JP¥155.0b due beyond that. Offsetting this, it had JP¥40.5b in cash and JP¥114.7b in receivables that were due within 12 months. So its liabilities total JP¥177.8b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of JP¥239.0b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Resorttrust boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Resorttrust has boosted its EBIT by 71%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Resorttrust's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Resorttrust has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Resorttrust actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although Resorttrust's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of JP¥27.9b. The cherry on top was that in converted 120% of that EBIT to free cash flow, bringing in JP¥20b. So we don't think Resorttrust's use of debt is risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with Resorttrust .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.