These 4 Measures Indicate That CROOZ (TYO:2138) Is Using Debt Safely

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. Importantly, CROOZ, Inc. (TYO:2138) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

Check out our latest analysis for CROOZ

What Is CROOZ's Net Debt?

As you can see below, CROOZ had JP¥11.4b of debt at December 2020, down from JP¥13.0b a year prior. However, it does have JP¥15.4b in cash offsetting this, leading to net cash of JP¥3.98b.

How Strong Is CROOZ's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CROOZ had liabilities of JP¥7.23b due within 12 months and liabilities of JP¥11.2b due beyond that. Offsetting this, it had JP¥15.4b in cash and JP¥6.74b in receivables that were due within 12 months. So it actually has JP¥3.65b more liquid assets than total liabilities.

This short term liquidity is a sign that CROOZ could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that CROOZ has more cash than debt is arguably a good indication that it can manage its debt safely.

Although CROOZ made a loss at the EBIT level, last year, it was also good to see that it generated JP¥2.2b in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since CROOZ will need earnings to service that debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. CROOZ 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. During the last year, CROOZ generated free cash flow amounting to a very robust 91% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that CROOZ has net cash of JP¥3.98b, as well as more liquid assets than liabilities. The cherry on top was that in converted 91% of that EBIT to free cash flow, bringing in JP¥2.0b. So we don't think CROOZ's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 4 warning signs we've spotted with CROOZ (including 2 which are concerning) .

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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