Tabikobo (TSE:6548) Is Using Debt Safely

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.' 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. We can see that Tabikobo Co. Ltd. (TSE:6548) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Tabikobo

How Much Debt Does Tabikobo Carry?

The image below, which you can click on for greater detail, shows that Tabikobo had debt of JP¥500.0m at the end of March 2024, a reduction from JP¥2.30b over a year. However, its balance sheet shows it holds JP¥2.51b in cash, so it actually has JP¥2.01b net cash.

How Healthy Is Tabikobo's Balance Sheet?

We can see from the most recent balance sheet that Tabikobo had liabilities of JP¥612.0m falling due within a year, and liabilities of JP¥537.0m due beyond that. Offsetting this, it had JP¥2.51b in cash and JP¥195.0m in receivables that were due within 12 months. So it actually has JP¥1.56b more liquid assets than total liabilities.

This surplus liquidity suggests that Tabikobo's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Tabikobo boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Tabikobo 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 Tabikobo wasn't profitable at an EBIT level, but managed to grow its revenue by 120%, to JP¥2.8b. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is Tabikobo?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Tabikobo had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through JP¥100m of cash and made a loss of JP¥248m. While this does make the company a bit risky, it's important to remember it has net cash of JP¥2.01b. That kitty means the company can keep spending for growth for at least two years, at current rates. The good news for shareholders is that Tabikobo has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with Tabikobo (at least 2 which can't be ignored) , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com