Is Immuno-Biological Laboratories (TYO:4570) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Immuno-Biological Laboratories Co., Ltd. (TYO:4570) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

Check out our latest analysis for Immuno-Biological Laboratories

What Is Immuno-Biological Laboratories's Debt?

The image below, which you can click on for greater detail, shows that Immuno-Biological Laboratories had debt of JP¥263.0m at the end of September 2020, a reduction from JP¥605.0m over a year. But it also has JP¥875.0m in cash to offset that, meaning it has JP¥612.0m net cash.

How Strong Is Immuno-Biological Laboratories' Balance Sheet?

We can see from the most recent balance sheet that Immuno-Biological Laboratories had liabilities of JP¥353.0m falling due within a year, and liabilities of JP¥29.0m due beyond that. On the other hand, it had cash of JP¥875.0m and JP¥152.0m worth of receivables due within a year. So it actually has JP¥645.0m more liquid assets than total liabilities.

This surplus suggests that Immuno-Biological Laboratories has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Immuno-Biological Laboratories 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 you can't view debt in total isolation; since Immuno-Biological Laboratories 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.

Over 12 months, Immuno-Biological Laboratories made a loss at the EBIT level, and saw its revenue drop to JP¥593m, which is a fall of 5.4%. We would much prefer see growth.

So How Risky Is Immuno-Biological Laboratories?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Immuno-Biological Laboratories 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¥574m and booked a JP¥644m accounting loss. But at least it has JP¥612.0m on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 3 warning signs for Immuno-Biological Laboratories you should be aware of, and 1 of them is potentially serious.

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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