We Think Bengo4.comInc (TSE:6027) Can Stay On Top Of Its Debt

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.' 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 note that Bengo4.com,Inc. (TSE:6027) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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 think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Bengo4.comInc Carry?

You can click the graphic below for the historical numbers, but it shows that Bengo4.comInc had JP¥2.63b of debt in December 2024, down from JP¥2.87b, one year before. But it also has JP¥3.56b in cash to offset that, meaning it has JP¥925.0m net cash.

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¥2.93b due within 12 months and liabilities of JP¥2.74b due beyond that. Offsetting this, it had JP¥3.56b in cash and JP¥1.82b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥292.8m.

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¥54.3b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Bengo4.comInc boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Bengo4.comInc

On the other hand, Bengo4.comInc's EBIT dived 13%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Bengo4.comInc has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Bengo4.comInc's free cash flow amounted to 30% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about Bengo4.comInc's liabilities, but we can be reassured by the fact it has has net cash of JP¥925.0m. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Bengo4.comInc you should be aware of, and 1 of them shouldn't be ignored.

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. 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.