Is Access Group Holdings (TYO:7042) Using Debt In A Risky Way?

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. We note that Access Group Holdings Co., Ltd. (TYO:7042) does have debt on its balance sheet. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Access Group Holdings

How Much Debt Does Access Group Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Access Group Holdings had JP¥2.48b of debt, an increase on JP¥1.09b, over one year. However, it does have JP¥2.81b in cash offsetting this, leading to net cash of JP¥329.0m.

How Healthy Is Access Group Holdings's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Access Group Holdings had liabilities of JP¥2.69b due within 12 months and liabilities of JP¥387.0m due beyond that. Offsetting these obligations, it had cash of JP¥2.81b as well as receivables valued at JP¥472.0m due within 12 months. So it can boast JP¥206.0m more liquid assets than total liabilities.

It's good to see that Access Group Holdings has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Access Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Access Group Holdings'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.

Over 12 months, Access Group Holdings made a loss at the EBIT level, and saw its revenue drop to JP¥4.0b, which is a fall of 11%. That's not what we would hope to see.

So How Risky Is Access Group Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Access Group Holdings lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of JP¥323m and booked a JP¥205m accounting loss. But the saving grace is the JP¥329.0m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. 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 Access Group Holdings you should be aware of, and 3 of them are a bit concerning.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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