ChiikishinbunshaLtd (TYO:2164) Has Debt But No Earnings; Should You Worry?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that Chiikishinbunsha Co.,Ltd. (TYO:2164) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for ChiikishinbunshaLtd

What Is ChiikishinbunshaLtd's Net Debt?

As you can see below, at the end of August 2020, ChiikishinbunshaLtd had JP¥617.0m of debt, up from JP¥224.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds JP¥840.0m in cash, so it actually has JP¥223.0m net cash.

How Healthy Is ChiikishinbunshaLtd's Balance Sheet?

According to the last reported balance sheet, ChiikishinbunshaLtd had liabilities of JP¥743.0m due within 12 months, and liabilities of JP¥505.0m due beyond 12 months. Offsetting this, it had JP¥840.0m in cash and JP¥268.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥140.0m.

Of course, ChiikishinbunshaLtd has a market capitalization of JP¥1.43b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, ChiikishinbunshaLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since ChiikishinbunshaLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, ChiikishinbunshaLtd made a loss at the EBIT level, and saw its revenue drop to JP¥3.3b, which is a fall of 18%. That's not what we would hope to see.

So How Risky Is ChiikishinbunshaLtd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year ChiikishinbunshaLtd had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through JP¥323m of cash and made a loss of JP¥332m. With only JP¥223.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Take risks, for example - ChiikishinbunshaLtd has 1 warning sign we think you should be aware of.

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.

When trading ChiikishinbunshaLtd or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.