Is ChiikishinbunshaLtd (TYO:2164) Using Debt In A Risky Way?

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. As with many other companies Chiikishinbunsha Co.,Ltd. (TYO:2164) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for ChiikishinbunshaLtd

What Is ChiikishinbunshaLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of February 2021 ChiikishinbunshaLtd had JP¥830.0m of debt, an increase on JP¥184.0m, over one year. But on the other hand it also has JP¥983.0m in cash, leading to a JP¥153.0m net cash position.

A Look At ChiikishinbunshaLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that ChiikishinbunshaLtd had liabilities of JP¥796.0m due within 12 months and liabilities of JP¥688.0m due beyond that. On the other hand, it had cash of JP¥983.0m and JP¥372.0m worth of receivables due within a year. So it has liabilities totalling JP¥129.0m more than its cash and near-term receivables, combined.

Of course, ChiikishinbunshaLtd has a market capitalization of JP¥1.61b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, ChiikishinbunshaLtd boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since ChiikishinbunshaLtd will need earnings to service that debt. 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.

In the last year ChiikishinbunshaLtd had a loss before interest and tax, and actually shrunk its revenue by 26%, to JP¥2.9b. To be frank that doesn't bode well.

So How Risky Is ChiikishinbunshaLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months ChiikishinbunshaLtd lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of JP¥308m and booked a JP¥365m accounting loss. With only JP¥153.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with ChiikishinbunshaLtd (including 1 which can't be ignored) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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