Does Saylor Advertising.Inc (TYO:2156) Have A Healthy Balance Sheet?

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 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 note that Saylor Advertising.Inc. (TYO:2156) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Saylor Advertising.Inc

What Is Saylor Advertising.Inc's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Saylor Advertising.Inc had debt of JP¥1.01b, up from JP¥813.0m in one year. However, it also had JP¥942.0m in cash, and so its net debt is JP¥71.0m.

How Healthy Is Saylor Advertising.Inc's Balance Sheet?

According to the last reported balance sheet, Saylor Advertising.Inc had liabilities of JP¥1.60b due within 12 months, and liabilities of JP¥847.0m due beyond 12 months. Offsetting these obligations, it had cash of JP¥942.0m as well as receivables valued at JP¥863.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥641.0m.

This deficit isn't so bad because Saylor Advertising.Inc is worth JP¥1.23b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Saylor Advertising.Inc'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 Saylor Advertising.Inc had a loss before interest and tax, and actually shrunk its revenue by 24%, to JP¥6.6b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Saylor Advertising.Inc's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at JP¥108m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through JP¥57m of cash over the last year. So to be blunt we think it is risky. 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. For example, we've discovered 4 warning signs for Saylor Advertising.Inc (2 are a bit unpleasant!) that you should be aware of before investing here.

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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