Is Bestone.ComLtd (TSE:6577) Using Too Much Debt?

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 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?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Bestone.ComLtd

How Much Debt Does Bestone.ComLtd Carry?

As you can see below, Bestone.ComLtd had JP¥1.13b of debt, at January 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have JP¥1.35b in cash offsetting this, leading to net cash of JP¥211.0m.

How Healthy Is Bestone.ComLtd's Balance Sheet?

The latest balance sheet data shows that Bestone.ComLtd had liabilities of JP¥1.17b due within a year, and liabilities of JP¥875.0m falling due after that. On the other hand, it had cash of JP¥1.35b and JP¥211.0m worth of receivables due within a year. So its liabilities total JP¥490.0m more than the combination of its cash and short-term receivables.

Of course, Bestone.ComLtd has a market capitalization of JP¥3.92b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Bestone.ComLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Bestone.ComLtd turned things around in the last 12 months, delivering and EBIT of JP¥44m. 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 Bestone.ComLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Bestone.ComLtd 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, Bestone.ComLtd actually produced more free cash flow than EBIT over the last year. 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 Bestone.ComLtd'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¥211.0m. And it impressed us with free cash flow of JP¥78m, being 177% of its EBIT. So we don't think Bestone.ComLtd's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Bestone.ComLtd you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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