Does Allied Architects (TSE:6081) Have A Healthy Balance Sheet?

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 can see that Allied Architects, Inc. (TSE:6081) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Allied Architects

What Is Allied Architects's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Allied Architects had debt of JP¥658.0m, up from JP¥317.0m in one year. But on the other hand it also has JP¥2.08b in cash, leading to a JP¥1.42b net cash position.

How Strong Is Allied Architects' Balance Sheet?

The latest balance sheet data shows that Allied Architects had liabilities of JP¥773.0m due within a year, and liabilities of JP¥593.0m falling due after that. Offsetting this, it had JP¥2.08b in cash and JP¥832.0m in receivables that were due within 12 months. So it can boast JP¥1.54b more liquid assets than total liabilities.

This surplus strongly suggests that Allied Architects has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Allied Architects has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Allied Architects will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Allied Architects had a loss before interest and tax, and actually shrunk its revenue by 15%, to JP¥3.6b. We would much prefer see growth.

So How Risky Is Allied Architects?

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 Allied Architects lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through JP¥63m of cash and made a loss of JP¥708m. With only JP¥1.42b on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the 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 example Allied Architects has 3 warning signs (and 2 which are a bit unpleasant) we think you should know about.

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.