Does Data HorizonLtd (TSE:3628) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Data Horizon Co.,Ltd. (TSE:3628) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Data HorizonLtd

What Is Data HorizonLtd's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Data HorizonLtd had debt of JP¥4.24b, up from JP¥2.90b in one year. However, because it has a cash reserve of JP¥929.0m, its net debt is less, at about JP¥3.31b.

How Strong Is Data HorizonLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Data HorizonLtd had liabilities of JP¥4.86b due within 12 months and liabilities of JP¥370.0m due beyond that. On the other hand, it had cash of JP¥929.0m and JP¥3.32b worth of receivables due within a year. So it has liabilities totalling JP¥976.0m more than its cash and near-term receivables, combined.

Given Data HorizonLtd has a market capitalization of JP¥7.09b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 Data HorizonLtd 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 Data HorizonLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 25%, to JP¥5.2b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Data HorizonLtd managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at JP¥551m. 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¥1.3b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Data HorizonLtd (3 shouldn't be ignored!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

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