Does Berg EarthLtd (TYO:1383) Have A Healthy Balance Sheet?

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.' 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. Importantly, Berg Earth Co.,Ltd. (TYO:1383) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Berg EarthLtd

How Much Debt Does Berg EarthLtd Carry?

As you can see below, at the end of October 2020, Berg EarthLtd had JP¥2.00b of debt, up from JP¥1.35b a year ago. Click the image for more detail. However, it also had JP¥728.0m in cash, and so its net debt is JP¥1.27b.

How Healthy Is Berg EarthLtd's Balance Sheet?

According to the last reported balance sheet, Berg EarthLtd had liabilities of JP¥2.53b due within 12 months, and liabilities of JP¥995.0m due beyond 12 months. Offsetting this, it had JP¥728.0m in cash and JP¥1.18b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥1.62b.

While this might seem like a lot, it is not so bad since Berg EarthLtd has a market capitalization of JP¥2.78b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 Berg EarthLtd 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.

Over 12 months, Berg EarthLtd reported revenue of JP¥5.2b, which is a gain of 6.4%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Berg EarthLtd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at JP¥124m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled JP¥297m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. To that end, you should learn about the 2 warning signs we've spotted with Berg EarthLtd (including 1 which doesn't sit too well with us) .

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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