David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies The Yonkyu Co.,Ltd. (TYO:9955) makes use of debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for YonkyuLtd
What Is YonkyuLtd's Debt?
As you can see below, YonkyuLtd had JP¥3.70b of debt at September 2020, down from JP¥4.08b a year prior. However, it does have JP¥16.4b in cash offsetting this, leading to net cash of JP¥12.7b.
How Strong Is YonkyuLtd's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that YonkyuLtd had liabilities of JP¥6.36b due within 12 months and liabilities of JP¥1.86b due beyond that. Offsetting this, it had JP¥16.4b in cash and JP¥6.80b in receivables that were due within 12 months. So it actually has JP¥15.0b more liquid assets than total liabilities.
This luscious liquidity implies that YonkyuLtd's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Simply put, the fact that YonkyuLtd has more cash than debt is arguably a good indication that it can manage its debt safely.
On the other hand, YonkyuLtd saw its EBIT drop by 2.7% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its 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 YonkyuLtd 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While YonkyuLtd 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. Over the last three years, YonkyuLtd recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.
Summing up
While it is always sensible to investigate a company's debt, in this case YonkyuLtd has JP¥12.7b in net cash and a decent-looking balance sheet. So is YonkyuLtd'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 4 warning signs for YonkyuLtd (1 can't be ignored!) that you should be aware of before investing here.
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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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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About TSE:9955
Adequate balance sheet with questionable track record.
