Is LIFULLLtd (TSE:2120) 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies LIFULL Co.,Ltd. (TSE:2120) makes use of debt. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is LIFULLLtd's Net Debt?

As you can see below, at the end of December 2024, LIFULLLtd had JP¥6.64b of debt, up from JP¥5.03b a year ago. Click the image for more detail. But it also has JP¥10.8b in cash to offset that, meaning it has JP¥4.20b net cash.

A Look At LIFULLLtd's Liabilities

According to the last reported balance sheet, LIFULLLtd had liabilities of JP¥6.76b due within 12 months, and liabilities of JP¥12.2b due beyond 12 months. Offsetting these obligations, it had cash of JP¥10.8b as well as receivables valued at JP¥3.96b due within 12 months. So it has liabilities totalling JP¥4.13b more than its cash and near-term receivables, combined.

This deficit isn't so bad because LIFULLLtd is worth JP¥18.8b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, LIFULLLtd 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 future earnings, more than anything, that will determine LIFULLLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Check out our latest analysis for LIFULLLtd

Over 12 months, LIFULLLtd made a loss at the EBIT level, and saw its revenue drop to JP¥35b, which is a fall of 6.4%. We would much prefer see growth.

So How Risky Is LIFULLLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that LIFULLLtd 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¥4.2b and booked a JP¥4.5b accounting loss. With only JP¥4.20b on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for LIFULLLtd that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.