Is Resonac Holdings (TSE:4004) Using Too Much Debt?

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. As with many other companies Resonac Holdings Corporation (TSE:4004) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Resonac Holdings

What Is Resonac Holdings's Debt?

The image below, which you can click on for greater detail, shows that Resonac Holdings had debt of JP¥1.00t at the end of December 2023, a reduction from JP¥1.05t over a year. However, it does have JP¥190.3b in cash offsetting this, leading to net debt of about JP¥811.6b.

How Healthy Is Resonac Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Resonac Holdings had liabilities of JP¥461.9b due within 12 months and liabilities of JP¥991.4b due beyond that. Offsetting these obligations, it had cash of JP¥190.3b as well as receivables valued at JP¥264.4b due within 12 months. So its liabilities total JP¥998.6b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the JP¥652.3b 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, Resonac Holdings 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 ultimately the future profitability of the business will decide if Resonac Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Resonac Holdings made a loss at the EBIT level, and saw its revenue drop to JP¥1.3t, which is a fall of 7.5%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Resonac Holdings produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at JP¥3.8b. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of JP¥19b didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Resonac Holdings (of which 1 is a bit concerning!) you should know about.

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.