Does RenetJapanGroupInc (TSE:3556) Have A Healthy Balance Sheet?

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.' 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. As with many other companies RenetJapanGroup,Inc. (TSE:3556) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for RenetJapanGroupInc

What Is RenetJapanGroupInc's Net Debt?

As you can see below, RenetJapanGroupInc had JP¥8.74b of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of JP¥2.00b, its net debt is less, at about JP¥6.75b.

How Strong Is RenetJapanGroupInc's Balance Sheet?

The latest balance sheet data shows that RenetJapanGroupInc had liabilities of JP¥8.35b due within a year, and liabilities of JP¥6.16b falling due after that. Offsetting these obligations, it had cash of JP¥2.00b as well as receivables valued at JP¥6.38b due within 12 months. So its liabilities total JP¥6.14b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the JP¥3.74b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, RenetJapanGroupInc would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since RenetJapanGroupInc will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year RenetJapanGroupInc wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to JP¥12b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate RenetJapanGroupInc's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping JP¥1.0b. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of JP¥450m over the last twelve months. So suffice it to say 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. To that end, you should learn about the 4 warning signs we've spotted with RenetJapanGroupInc (including 2 which are a bit unpleasant) .

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. 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.