Is Johnan Academic Preparatory Institute (TSE:4720) 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Johnan Academic Preparatory Institute, Inc. (TSE:4720) does use debt in its business. But should shareholders be worried about its use of debt?

Our free stock report includes 2 warning signs investors should be aware of before investing in Johnan Academic Preparatory Institute. Read for free now.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

What Is Johnan Academic Preparatory Institute's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Johnan Academic Preparatory Institute had JP¥1.16b of debt, an increase on JP¥591.0m, over one year. However, it does have JP¥1.76b in cash offsetting this, leading to net cash of JP¥605.0m.

How Strong Is Johnan Academic Preparatory Institute's Balance Sheet?

According to the last reported balance sheet, Johnan Academic Preparatory Institute had liabilities of JP¥1.58b due within 12 months, and liabilities of JP¥1.97b due beyond 12 months. On the other hand, it had cash of JP¥1.76b and JP¥206.0m worth of receivables due within a year. So its liabilities total JP¥1.57b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of JP¥2.10b, so it does suggest shareholders should keep an eye on Johnan Academic Preparatory Institute's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Johnan Academic Preparatory Institute also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Johnan Academic Preparatory Institute 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.

Check out our latest analysis for Johnan Academic Preparatory Institute

Over 12 months, Johnan Academic Preparatory Institute made a loss at the EBIT level, and saw its revenue drop to JP¥5.7b, which is a fall of 4.4%. We would much prefer see growth.

So How Risky Is Johnan Academic Preparatory Institute?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Johnan Academic Preparatory Institute had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through JP¥114m of cash and made a loss of JP¥255m. While this does make the company a bit risky, it's important to remember it has net cash of JP¥605.0m. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. We've identified 2 warning signs with Johnan Academic Preparatory Institute (at least 1 which is significant) , and understanding them should be part of your investment process.

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. 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.