Asian Star (TYO:8946) Has Debt But No Earnings; Should You Worry?

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 Asian Star Co. (TYO:8946) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Asian Star

What Is Asian Star's Debt?

You can click the graphic below for the historical numbers, but it shows that Asian Star had JP¥949.0m of debt in December 2020, down from JP¥1.19b, one year before. However, it does have JP¥958.0m in cash offsetting this, leading to net cash of JP¥9.00m.

A Look At Asian Star's Liabilities

The latest balance sheet data shows that Asian Star had liabilities of JP¥1.02b due within a year, and liabilities of JP¥939.0m falling due after that. Offsetting these obligations, it had cash of JP¥958.0m as well as receivables valued at JP¥73.0m due within 12 months. So it has liabilities totalling JP¥927.0m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Asian Star has a market capitalization of JP¥1.75b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Asian Star also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Asian Star'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.

Over 12 months, Asian Star made a loss at the EBIT level, and saw its revenue drop to JP¥2.0b, which is a fall of 3.8%. We would much prefer see growth.

So How Risky Is Asian Star?

While Asian Star lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow JP¥150m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. For example, we've discovered 3 warning signs for Asian Star (1 is concerning!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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