Is Access Group Holdings (TYO:7042) Using Too Much Debt?

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.' 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. As with many other companies Access Group Holdings Co., Ltd. (TYO:7042) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Access Group Holdings

What Is Access Group Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Access Group Holdings had debt of JP¥2.26b, up from JP¥960.0m in one year. However, it does have JP¥2.39b in cash offsetting this, leading to net cash of JP¥131.0m.

How Strong Is Access Group Holdings' Balance Sheet?

According to the last reported balance sheet, Access Group Holdings had liabilities of JP¥2.57b due within 12 months, and liabilities of JP¥329.0m due beyond 12 months. Offsetting this, it had JP¥2.39b in cash and JP¥400.0m in receivables that were due within 12 months. So its liabilities total JP¥113.0m more than the combination of its cash and short-term receivables.

Given Access Group Holdings has a market capitalization of JP¥972.9m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Access Group Holdings 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 it is Access Group Holdings'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 Access Group Holdings had a loss before interest and tax, and actually shrunk its revenue by 16%, to JP¥3.7b. That's not what we would hope to see.

So How Risky Is Access Group Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Access Group Holdings lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through JP¥69m of cash and made a loss of JP¥363m. But the saving grace is the JP¥131.0m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. Be aware that Access Group Holdings is showing 3 warning signs in our investment analysis , and 2 of those can't be ignored...

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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