YUKE'SLtd (TYO:4334) 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 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. We can see that YUKE'S Co.,Ltd. (TYO:4334) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for YUKE'SLtd

What Is YUKE'SLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that YUKE'SLtd had JP¥3.95b of debt in October 2020, down from JP¥5.30b, one year before. However, its balance sheet shows it holds JP¥5.91b in cash, so it actually has JP¥1.96b net cash.

A Look At YUKE'SLtd's Liabilities

According to the last reported balance sheet, YUKE'SLtd had liabilities of JP¥4.63b due within 12 months, and liabilities of JP¥182.0m due beyond 12 months. Offsetting this, it had JP¥5.91b in cash and JP¥262.0m in receivables that were due within 12 months. So it can boast JP¥1.35b more liquid assets than total liabilities.

This surplus strongly suggests that YUKE'SLtd 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. Succinctly put, YUKE'SLtd 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 YUKE'SLtd 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.

In the last year YUKE'SLtd had a loss before interest and tax, and actually shrunk its revenue by 49%, to JP¥2.3b. To be frank that doesn't bode well.

So How Risky Is YUKE'SLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year YUKE'SLtd had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through JP¥565m of cash and made a loss of JP¥915m. With only JP¥1.96b 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for YUKE'SLtd you should be aware of, and 2 of them are concerning.

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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