These 4 Measures Indicate That Bengo4.comInc (TSE:6027) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Bengo4.com,Inc. (TSE:6027) does carry debt. But is this debt a concern to shareholders?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Bengo4.comInc

How Much Debt Does Bengo4.comInc Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Bengo4.comInc had debt of JP¥2.75b, up from none in one year. But on the other hand it also has JP¥3.47b in cash, leading to a JP¥724.0m net cash position.

How Healthy Is Bengo4.comInc's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Bengo4.comInc had liabilities of JP¥2.91b due within 12 months and liabilities of JP¥3.10b due beyond that. Offsetting these obligations, it had cash of JP¥3.47b as well as receivables valued at JP¥1.75b due within 12 months. So its liabilities total JP¥786.0m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Bengo4.comInc's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the JP¥73.6b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Bengo4.comInc also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Bengo4.comInc grew its EBIT at 13% over the last year, further increasing its ability to manage debt. 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 Bengo4.comInc's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Bengo4.comInc may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Bengo4.comInc recorded free cash flow of 34% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Bengo4.comInc has JP¥724.0m in net cash. And it also grew its EBIT by 13% over the last year. So we don't have any problem with Bengo4.comInc's use of debt. 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 Bengo4.comInc that you should be aware of.

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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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.

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