The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Allied Architects, Inc. (TSE:6081) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Allied Architects
What Is Allied Architects's Net Debt?
The image below, which you can click on for greater detail, shows that at March 2024 Allied Architects had debt of JPĀ„754.0m, up from JPĀ„425.0m in one year. However, its balance sheet shows it holds JPĀ„2.32b in cash, so it actually has JPĀ„1.56b net cash.
A Look At Allied Architects' Liabilities
We can see from the most recent balance sheet that Allied Architects had liabilities of JPĀ„1.04b falling due within a year, and liabilities of JPĀ„617.0m due beyond that. Offsetting this, it had JPĀ„2.32b in cash and JPĀ„940.0m in receivables that were due within 12 months. So it can boast JPĀ„1.61b 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). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Allied Architects boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Allied Architects'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 Allied Architects had a loss before interest and tax, and actually shrunk its revenue by 13%, to JPĀ„3.9b. 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 in the last year Allied Architects had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of JPĀ„258m and booked a JPĀ„378m accounting loss. Given it only has net cash of JPĀ„1.56b, the company may need to raise more capital if it doesn't reach break-even 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Allied Architects , and understanding them should be part of your investment process.
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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About TSE:6081
Allied Architects
Engages in marketing DX support business in Japan, China, and internationally.
Adequate balance sheet very low.
