Yamano Holdings (TYO:7571) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Yamano Holdings Corporation (TYO:7571) 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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Yamano Holdings

What Is Yamano Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Yamano Holdings had JP¥4.13b of debt, an increase on JP¥1.19b, over one year. But on the other hand it also has JP¥4.36b in cash, leading to a JP¥231.0m net cash position.

How Healthy Is Yamano Holdings's Balance Sheet?

We can see from the most recent balance sheet that Yamano Holdings had liabilities of JP¥6.91b falling due within a year, and liabilities of JP¥1.97b due beyond that. Offsetting this, it had JP¥4.36b in cash and JP¥2.05b in receivables that were due within 12 months. So it has liabilities totalling JP¥2.47b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's JP¥2.28b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. Yamano Holdings boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. When analysing debt levels, the balance sheet is the obvious place to start. But it is Yamano Holdings'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.

In the last year Yamano Holdings had a loss before interest and tax, and actually shrunk its revenue by 8.0%, to JP¥13b. We would much prefer see growth.

So How Risky Is Yamano Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Yamano Holdings had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of JP¥392m and booked a JP¥348m accounting loss. With only JP¥231.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Yamano Holdings has 3 warning signs (and 2 which don't sit too well with us) we think you should know about.

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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