Is Bestone.ComLtd (TSE:6577) A Risky Investment?

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. Importantly, Bestone.Com Co.,Ltd (TSE:6577) does carry debt. But is this debt a concern to shareholders?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Bestone.ComLtd

How Much Debt Does Bestone.ComLtd Carry?

As you can see below, Bestone.ComLtd had JP¥987.0m of debt, at July 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds JP¥1.60b in cash, so it actually has JP¥615.0m net cash.

How Strong Is Bestone.ComLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Bestone.ComLtd had liabilities of JP¥964.0m due within 12 months and liabilities of JP¥755.0m due beyond that. Offsetting this, it had JP¥1.60b in cash and JP¥147.0m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Bestone.ComLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the JP¥5.02b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Bestone.ComLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Bestone.ComLtd grew its EBIT by 1,220% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Bestone.ComLtd's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Bestone.ComLtd 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. Over the last two years, Bestone.ComLtd actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Bestone.ComLtd has net cash of JP¥615.0m, as well as more liquid assets than liabilities. The cherry on top was that in converted 124% of that EBIT to free cash flow, bringing in JP¥266m. So is Bestone.ComLtd's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 3 warning signs for Bestone.ComLtd that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.