Health Check: How Prudently Does Village VanguardLTD (TYO:2769) Use 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 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. Importantly, Village Vanguard CO.,LTD. (TYO:2769) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Village VanguardLTD

What Is Village VanguardLTD's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of November 2020 Village VanguardLTD had JP¥13.7b of debt, an increase on JP¥11.0b, over one year. However, it also had JP¥8.01b in cash, and so its net debt is JP¥5.72b.

A Look At Village VanguardLTD's Liabilities

We can see from the most recent balance sheet that Village VanguardLTD had liabilities of JP¥12.0b falling due within a year, and liabilities of JP¥9.28b due beyond that. Offsetting these obligations, it had cash of JP¥8.01b as well as receivables valued at JP¥1.23b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥12.0b.

This deficit casts a shadow over the JP¥7.66b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Village VanguardLTD would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Village VanguardLTD 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.

Over 12 months, Village VanguardLTD made a loss at the EBIT level, and saw its revenue drop to JP¥27b, which is a fall of 18%. That's not what we would hope to see.

Caveat Emptor

Not only did Village VanguardLTD's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost JP¥599m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of JP¥1.1b didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. 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. We've identified 1 warning sign with Village VanguardLTD , and understanding them should be part of your investment process.

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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