We Think Birdman (TSE:7063) Has A Fair Chunk Of 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.' 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, Birdman Inc. (TSE:7063) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Birdman

What Is Birdman's Net Debt?

As you can see below, at the end of December 2023, Birdman had JP¥1.72b of debt, up from JP¥1.48b a year ago. Click the image for more detail. However, because it has a cash reserve of JP¥164.0m, its net debt is less, at about JP¥1.55b.

A Look At Birdman's Liabilities

We can see from the most recent balance sheet that Birdman had liabilities of JP¥2.20b falling due within a year, and liabilities of JP¥583.0m due beyond that. Offsetting this, it had JP¥164.0m in cash and JP¥495.0m in receivables that were due within 12 months. So its liabilities total JP¥2.12b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Birdman is worth JP¥6.81b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Birdman 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 Birdman had a loss before interest and tax, and actually shrunk its revenue by 5.0%, to JP¥3.8b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Birdman produced an earnings before interest and tax (EBIT) loss. Indeed, it lost JP¥273m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled JP¥791m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Birdman (3 are concerning!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.