We Think Dream VisionLtd (TSE:3185) Has A Fair Chunk Of Debt

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.' 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. We can see that Dream Vision Co.,Ltd. (TSE:3185) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Dream VisionLtd

How Much Debt Does Dream VisionLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Dream VisionLtd had JP¥1.47b of debt in September 2024, down from JP¥1.86b, one year before. However, it does have JP¥662.0m in cash offsetting this, leading to net debt of about JP¥806.0m.

How Strong Is Dream VisionLtd's Balance Sheet?

We can see from the most recent balance sheet that Dream VisionLtd had liabilities of JP¥2.00b falling due within a year, and liabilities of JP¥417.0m due beyond that. Offsetting this, it had JP¥662.0m in cash and JP¥375.0m in receivables that were due within 12 months. So its liabilities total JP¥1.38b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Dream VisionLtd has a market capitalization of JP¥3.20b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Dream VisionLtd'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.

Over 12 months, Dream VisionLtd made a loss at the EBIT level, and saw its revenue drop to JP¥4.6b, which is a fall of 4.2%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Dream VisionLtd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at JP¥213m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through JP¥138m of cash over the last year. So to be blunt we think it is risky. 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. To that end, you should learn about the 4 warning signs we've spotted with Dream VisionLtd (including 2 which are concerning) .

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.