Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Ray Corporation (TYO:4317) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Ray
What Is Ray's Net Debt?
The image below, which you can click on for greater detail, shows that at August 2020 Ray had debt of JP¥1.57b, up from JP¥950.0m in one year. But on the other hand it also has JP¥3.05b in cash, leading to a JP¥1.48b net cash position.
How Healthy Is Ray's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Ray had liabilities of JP¥2.55b due within 12 months and liabilities of JP¥677.0m due beyond that. On the other hand, it had cash of JP¥3.05b and JP¥1.09b worth of receivables due within a year. So it actually has JP¥909.0m more liquid assets than total liabilities.
This surplus suggests that Ray is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Ray boasts net cash, 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 you can't view debt in total isolation; since Ray 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 Ray had a loss before interest and tax, and actually shrunk its revenue by 26%, to JP¥8.9b. That makes us nervous, to say the least.
So How Risky Is Ray?
Although Ray had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of JP¥290m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Ray 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.
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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:4317
Flawless balance sheet with solid track record and pays a dividend.
