Is RISE (TYO:8836) Using Too Much Debt?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies RISE, Inc. (TYO:8836) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for RISE

What Is RISE's Debt?

As you can see below, RISE had JP¥188.0m of debt at September 2020, down from JP¥221.0m a year prior. But on the other hand it also has JP¥682.0m in cash, leading to a JP¥494.0m net cash position.

How Strong Is RISE's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that RISE had liabilities of JP¥141.0m due within 12 months and liabilities of JP¥321.0m due beyond that. Offsetting this, it had JP¥682.0m in cash and JP¥18.0m in receivables that were due within 12 months. So it actually has JP¥238.0m more liquid assets than total liabilities.

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

It was also good to see that despite losing money on the EBIT line last year, RISE turned things around in the last 12 months, delivering and EBIT of JP¥61m. The balance sheet is clearly the area to focus on when you are analysing debt. But it is RISE's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While RISE 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. Over the last year, RISE 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 we empathize with investors who find debt concerning, you should keep in mind that RISE has net cash of JP¥494.0m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥122m, being 200% of its EBIT. So is RISE's debt a risk? It doesn't seem so to us. 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. To that end, you should be aware of the 3 warning signs we've spotted with RISE .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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.
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