Is Impress Holdings (TSE:9479) Weighed On By Its Debt Load?

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. We note that Impress Holdings, Inc. (TSE:9479) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Impress Holdings

How Much Debt Does Impress Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Impress Holdings had JP¥430.0m of debt in September 2024, down from JP¥590.0m, one year before. However, its balance sheet shows it holds JP¥5.21b in cash, so it actually has JP¥4.78b net cash.

How Strong Is Impress Holdings' Balance Sheet?

We can see from the most recent balance sheet that Impress Holdings had liabilities of JP¥4.25b falling due within a year, and liabilities of JP¥1.92b due beyond that. Offsetting these obligations, it had cash of JP¥5.21b as well as receivables valued at JP¥4.22b due within 12 months. So it actually has JP¥3.26b more liquid assets than total liabilities.

This luscious liquidity implies that Impress Holdings' balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Impress Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Impress Holdings'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 Impress Holdings had a loss before interest and tax, and actually shrunk its revenue by 4.5%, to JP¥14b. That's not what we would hope to see.

So How Risky Is Impress Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Impress Holdings had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of JP¥111m and booked a JP¥931m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of JP¥4.78b. That means it could keep spending at its current rate for more than two years. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Impress Holdings (at least 2 which make us uncomfortable) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.