Here's Why Hakuten (TYO:2173) Can Afford Some Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Hakuten Corporation (TYO:2173) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Hakuten

How Much Debt Does Hakuten Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Hakuten had JP¥2.92b of debt, an increase on JP¥2.27b, over one year. However, because it has a cash reserve of JP¥2.17b, its net debt is less, at about JP¥751.0m.

How Healthy Is Hakuten's Balance Sheet?

The latest balance sheet data shows that Hakuten had liabilities of JP¥3.59b due within a year, and liabilities of JP¥378.0m falling due after that. Offsetting these obligations, it had cash of JP¥2.17b as well as receivables valued at JP¥922.0m due within 12 months. So its liabilities total JP¥877.0m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Hakuten has a market capitalization of JP¥3.19b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is Hakuten'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.

In the last year Hakuten had a loss before interest and tax, and actually shrunk its revenue by 36%, to JP¥8.2b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Hakuten's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable JP¥665m 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. We would feel better if it turned its trailing twelve month loss of JP¥337m into a profit. So we do think this stock is quite 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. Be aware that Hakuten is showing 2 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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