Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Advantage Risk Management Co., Ltd. (TSE:8769) does use debt in its business. 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. If things get really bad, the lenders can take control of the business. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Advantage Risk Management
What Is Advantage Risk Management's Debt?
The image below, which you can click on for greater detail, shows that at June 2024 Advantage Risk Management had debt of JPÂ¥331.0m, up from JPÂ¥203.0m in one year. But on the other hand it also has JPÂ¥1.90b in cash, leading to a JPÂ¥1.56b net cash position.
A Look At Advantage Risk Management's Liabilities
We can see from the most recent balance sheet that Advantage Risk Management had liabilities of JPÂ¥2.56b falling due within a year, and liabilities of JPÂ¥364.0m due beyond that. Offsetting this, it had JPÂ¥1.90b in cash and JPÂ¥962.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JPÂ¥68.0m.
Having regard to Advantage Risk Management's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the JPÂ¥9.61b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Advantage Risk Management boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, Advantage Risk Management grew its EBIT by 38% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is Advantage Risk Management's earnings that will influence how the balance sheet holds up in the future. 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Advantage Risk Management may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Advantage Risk Management recorded free cash flow of 20% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.
Summing Up
While it is always sensible to look at a company's total liabilities, it is very reassuring that Advantage Risk Management has JPÂ¥1.56b in net cash. And it impressed us with its EBIT growth of 38% over the last year. So is Advantage Risk Management's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Advantage Risk Management (including 1 which shouldn't be ignored) .
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. 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.
About TSE:8769
Advantage Risk Management
Provides mental health management and disability support services in Japan.
Excellent balance sheet with proven track record and pays a dividend.
