Is Gendai Agency (TYO:2411) A Risky Investment?

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 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, Gendai Agency Inc. (TYO:2411) does carry debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for Gendai Agency

What Is Gendai Agency's Net Debt?

As you can see below, at the end of December 2020, Gendai Agency had JP¥912.0m of debt, up from JP¥850.0m a year ago. Click the image for more detail. But it also has JP¥3.97b in cash to offset that, meaning it has JP¥3.06b net cash.

How Healthy Is Gendai Agency's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Gendai Agency had liabilities of JP¥1.03b due within 12 months and liabilities of JP¥673.0m due beyond that. On the other hand, it had cash of JP¥3.97b and JP¥1.23b worth of receivables due within a year. So it actually has JP¥3.50b more liquid assets than total liabilities.

This surplus strongly suggests that Gendai Agency has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Gendai Agency has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Gendai Agency'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 Gendai Agency had a loss before interest and tax, and actually shrunk its revenue by 32%, to JP¥7.8b. That makes us nervous, to say the least.

So How Risky Is Gendai Agency?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Gendai Agency had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of JP¥128m and booked a JP¥364m accounting loss. With only JP¥3.06b on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 Gendai Agency is showing 2 warning signs in our investment analysis , and 1 of those is a bit concerning...

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.

When trading Gendai Agency 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.