Does Waqoo (TSE:4937) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies Waqoo Inc. (TSE:4937) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. 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 Waqoo

What Is Waqoo's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Waqoo had JP¥800.0m of debt, an increase on JP¥635.0m, over one year. But it also has JP¥1.49b in cash to offset that, meaning it has JP¥694.0m net cash.

How Strong Is Waqoo's Balance Sheet?

According to the last reported balance sheet, Waqoo had liabilities of JP¥610.0m due within 12 months, and liabilities of JP¥430.0m due beyond 12 months. Offsetting these obligations, it had cash of JP¥1.49b as well as receivables valued at JP¥155.0m due within 12 months. So it can boast JP¥609.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Waqoo could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Waqoo has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Waqoo 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.

In the last year Waqoo had a loss before interest and tax, and actually shrunk its revenue by 21%, to JP¥1.8b. To be frank that doesn't bode well.

So How Risky Is Waqoo?

While Waqoo lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow JP¥23m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example Waqoo has 5 warning signs (and 1 which shouldn't be ignored) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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