Does J FrontierLtd (TSE:2934) 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.' 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 note that J Frontier Co.,Ltd. (TSE:2934) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 J FrontierLtd

How Much Debt Does J FrontierLtd Carry?

The image below, which you can click on for greater detail, shows that at February 2024 J FrontierLtd had debt of JP¥3.16b, up from JP¥1.96b in one year. However, it also had JP¥1.18b in cash, and so its net debt is JP¥1.98b.

How Healthy Is J FrontierLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that J FrontierLtd had liabilities of JP¥3.90b due within 12 months and liabilities of JP¥1.76b due beyond that. On the other hand, it had cash of JP¥1.18b and JP¥2.22b worth of receivables due within a year. So it has liabilities totalling JP¥2.26b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since J FrontierLtd has a market capitalization of JP¥7.31b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since J FrontierLtd 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.

In the last year J FrontierLtd's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, J FrontierLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable JP¥1.5b at the EBIT level. 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¥2.3b in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example J FrontierLtd has 5 warning signs (and 3 which are a bit concerning) we think you should know about.

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. 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