Here's Why RareJob (TSE:6096) Can Manage Its Debt Responsibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 RareJob Inc. (TSE:6096) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for RareJob

How Much Debt Does RareJob Carry?

You can click the graphic below for the historical numbers, but it shows that RareJob had JP¥2.25b of debt in September 2024, down from JP¥3.00b, one year before. However, it does have JP¥2.62b in cash offsetting this, leading to net cash of JP¥371.0m.

How Strong Is RareJob's Balance Sheet?

According to the last reported balance sheet, RareJob had liabilities of JP¥2.00b due within 12 months, and liabilities of JP¥2.29b due beyond 12 months. Offsetting these obligations, it had cash of JP¥2.62b as well as receivables valued at JP¥653.0m due within 12 months. So it has liabilities totalling JP¥1.01b more than its cash and near-term receivables, combined.

This deficit isn't so bad because RareJob is worth JP¥3.73b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, RareJob boasts net cash, so it's fair to say it does not have a heavy debt load!

While RareJob doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if RareJob can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. RareJob may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, RareJob generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While RareJob does have more liabilities than liquid assets, it also has net cash of JP¥371.0m. The cherry on top was that in converted 82% of that EBIT to free cash flow, bringing in JP¥426m. So is RareJob's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for RareJob you should know about.

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.