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.' 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. Importantly, Saylor Advertising.Inc. (TYO:2156) does carry debt. But should shareholders be worried about its use of debt?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Saylor Advertising.Inc
What Is Saylor Advertising.Inc's Net Debt?
As you can see below, Saylor Advertising.Inc had JP¥900.0m of debt at September 2020, down from JP¥956.0m a year prior. However, it does have JP¥893.0m in cash offsetting this, leading to net debt of about JP¥7.00m.
How Strong Is Saylor Advertising.Inc's Balance Sheet?
The latest balance sheet data shows that Saylor Advertising.Inc had liabilities of JP¥1.35b due within a year, and liabilities of JP¥861.0m falling due after that. On the other hand, it had cash of JP¥893.0m and JP¥740.0m worth of receivables due within a year. So it has liabilities totalling JP¥575.0m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Saylor Advertising.Inc has a market capitalization of JP¥997.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. But either way, Saylor Advertising.Inc has virtually no net debt, so it's fair to say it does not have a heavy debt load! 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, Saylor Advertising.Inc made a loss at the EBIT level, and saw its revenue drop to JP¥6.9b, which is a fall of 21%. 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). Indeed, it lost JP¥76m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled JP¥57m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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. Take risks, for example - Saylor Advertising.Inc has 4 warning signs (and 3 which are a bit concerning) 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. 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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About TSE:2156
Adequate balance sheet low.
