Is Global Food Creators (TYO:7559) Using Too Much Debt?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Global Food Creators Co., Ltd. (TYO:7559) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See our latest analysis for Global Food Creators

What Is Global Food Creators's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Global Food Creators had debt of JP¥661.0m, up from JP¥514.0m in one year. However, it does have JP¥7.95b in cash offsetting this, leading to net cash of JP¥7.29b.

A Look At Global Food Creators's Liabilities

Zooming in on the latest balance sheet data, we can see that Global Food Creators had liabilities of JP¥2.11b due within 12 months and liabilities of JP¥450.0m due beyond that. Offsetting these obligations, it had cash of JP¥7.95b as well as receivables valued at JP¥2.06b due within 12 months. So it actually has JP¥7.44b more liquid assets than total liabilities.

This luscious liquidity implies that Global Food Creators's balance sheet is sturdy like a giant sequoia tree. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Succinctly put, Global Food Creators boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Global Food Creators 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 Global Food Creators had a loss before interest and tax, and actually shrunk its revenue by 27%, to JP¥19b. That makes us nervous, to say the least.

So How Risky Is Global Food Creators?

Although Global Food Creators had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of JP¥251m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. There's no doubt the next few years will be crucial to how the business matures. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Global Food Creators (at least 1 which is a bit unpleasant) , 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. 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.
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