Is Living PlatformLtd (TSE:7091) Weighed On By Its Debt Load?

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.' 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 Living Platform,Ltd. (TSE:7091) does use debt in its business. But is this debt a concern to shareholders?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Living PlatformLtd

What Is Living PlatformLtd's Debt?

As you can see below, Living PlatformLtd had JP¥5.37b of debt at March 2024, down from JP¥6.34b a year prior. However, it also had JP¥1.13b in cash, and so its net debt is JP¥4.24b.

How Healthy Is Living PlatformLtd's Balance Sheet?

We can see from the most recent balance sheet that Living PlatformLtd had liabilities of JP¥3.02b falling due within a year, and liabilities of JP¥6.51b due beyond that. On the other hand, it had cash of JP¥1.13b and JP¥1.34b worth of receivables due within a year. So it has liabilities totalling JP¥7.06b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the JP¥4.16b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Living PlatformLtd would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Living PlatformLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Living PlatformLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to JP¥17b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Living PlatformLtd managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost JP¥82m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. But on the bright side the company actually produced a statutory profit of JP¥189m and free cash flow of JP¥878m. So there is definitely a chance that it can improve things in the next few years. 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. Case in point: We've spotted 4 warning signs for Living PlatformLtd you should be aware of, and 1 of them is potentially serious.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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