Does Precision System Science (TSE:7707) Have A Healthy Balance Sheet?

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.' 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. We note that Precision System Science Co., Ltd. (TSE:7707) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Precision System Science

How Much Debt Does Precision System Science Carry?

The image below, which you can click on for greater detail, shows that Precision System Science had debt of JP¥1.37b at the end of June 2024, a reduction from JP¥3.87b over a year. However, it does have JP¥1.92b in cash offsetting this, leading to net cash of JP¥550.0m.

How Healthy Is Precision System Science's Balance Sheet?

We can see from the most recent balance sheet that Precision System Science had liabilities of JP¥1.96b falling due within a year, and liabilities of JP¥296.0m due beyond that. Offsetting this, it had JP¥1.92b in cash and JP¥866.0m in receivables that were due within 12 months. So it actually has JP¥527.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Precision System Science could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Precision System Science has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Precision System Science'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.

Over 12 months, Precision System Science made a loss at the EBIT level, and saw its revenue drop to JP¥4.0b, which is a fall of 25%. That makes us nervous, to say the least.

So How Risky Is Precision System Science?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Precision System Science lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through JP¥129m of cash and made a loss of JP¥1.1b. But the saving grace is the JP¥550.0m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Precision System Science (including 2 which shouldn't be ignored) .

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.