Is Yamato Industry (TYO:7886) Weighed On By Its Debt Load?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Yamato Industry Co., Ltd. (TYO:7886) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Yamato Industry

How Much Debt Does Yamato Industry Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Yamato Industry had JP¥3.65b of debt, an increase on JP¥3.14b, over one year. However, it also had JP¥1.60b in cash, and so its net debt is JP¥2.04b.

How Strong Is Yamato Industry's Balance Sheet?

According to the last reported balance sheet, Yamato Industry had liabilities of JP¥4.07b due within 12 months, and liabilities of JP¥2.39b due beyond 12 months. On the other hand, it had cash of JP¥1.60b and JP¥2.73b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥2.13b.

The deficiency here weighs heavily on the JP¥702.1m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Yamato Industry would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Yamato Industry'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.

Over 12 months, Yamato Industry made a loss at the EBIT level, and saw its revenue drop to JP¥15b, which is a fall of 7.0%. That's not what we would hope to see.

Caveat Emptor

Importantly, Yamato Industry had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost JP¥62m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through JP¥193m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with Yamato Industry .

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. 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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