These 4 Measures Indicate That Good Life CompanyInc (TYO:2970) Is Using Debt Reasonably Well

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, Good Life Company,Inc. (TYO:2970) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Good Life CompanyInc

What Is Good Life CompanyInc's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Good Life CompanyInc had JP¥400.0m of debt, an increase on none, over one year. However, its balance sheet shows it holds JP¥1.26b in cash, so it actually has JP¥857.0m net cash.

A Look At Good Life CompanyInc's Liabilities

According to the last reported balance sheet, Good Life CompanyInc had liabilities of JP¥1.44b due within 12 months, and liabilities of JP¥27.0m due beyond 12 months. On the other hand, it had cash of JP¥1.26b and JP¥456.0m worth of receivables due within a year. So it can boast JP¥243.0m more liquid assets than total liabilities.

This surplus suggests that Good Life CompanyInc has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Good Life CompanyInc has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Good Life CompanyInc's saving grace is its low debt levels, because its EBIT has tanked 61% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is Good Life CompanyInc'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 company can only pay off debt with cold hard cash, not accounting profits. Good Life CompanyInc may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Good Life CompanyInc actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case Good Life CompanyInc has JP¥857.0m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥1.9b, being 211% of its EBIT. So we are not troubled with Good Life CompanyInc's debt use. 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. For example, we've discovered 4 warning signs for Good Life CompanyInc (1 is concerning!) that you should be aware of before investing here.

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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