These 4 Measures Indicate That Robot Home (TSE:1435) Is Using Debt Reasonably Well

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 Robot Home, Inc. (TSE:1435) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Robot Home

How Much Debt Does Robot Home Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Robot Home had debt of JP¥853.0m, up from JP¥582.0m in one year. However, its balance sheet shows it holds JP¥5.04b in cash, so it actually has JP¥4.19b net cash.

How Strong Is Robot Home's Balance Sheet?

According to the last reported balance sheet, Robot Home had liabilities of JP¥3.16b due within 12 months, and liabilities of JP¥274.0m due beyond 12 months. Offsetting these obligations, it had cash of JP¥5.04b as well as receivables valued at JP¥384.0m due within 12 months. So it actually has JP¥1.99b more liquid assets than total liabilities.

This surplus suggests that Robot Home has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Robot Home boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Robot Home has boosted its EBIT by 51%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Robot Home'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Robot Home has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Considering the last three years, Robot Home actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case Robot Home has JP¥4.19b in net cash and a decent-looking balance sheet. And we liked the look of last year's 51% year-on-year EBIT growth. So we don't have any problem with Robot Home's use of debt. 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. We've identified 1 warning sign with Robot Home , 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com