Health Check: How Prudently Does RenetJapanGroupInc (TSE:3556) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 is this debt a concern to shareholders?

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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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is RenetJapanGroupInc's Debt?

As you can see below, RenetJapanGroupInc had JP¥2.82b of debt at December 2024, down from JP¥8.03b a year prior. However, it does have JP¥700.0m in cash offsetting this, leading to net debt of about JP¥2.12b.

How Healthy Is RenetJapanGroupInc's Balance Sheet?

The latest balance sheet data shows that RenetJapanGroupInc had liabilities of JP¥4.10b due within a year, and liabilities of JP¥2.41b falling due after that. On the other hand, it had cash of JP¥700.0m and JP¥988.0m worth of receivables due within a year. So it has liabilities totalling JP¥4.82b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of JP¥4.94b, so it does suggest shareholders should keep an eye on RenetJapanGroupInc's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is RenetJapanGroupInc's earnings that will influence how the balance sheet holds up in the future. 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.

See our latest analysis for RenetJapanGroupInc

In the last year RenetJapanGroupInc's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months RenetJapanGroupInc produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping JP¥733m. 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. We would feel better if it turned its trailing twelve month loss of JP¥1.5b into a profit. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for RenetJapanGroupInc (1 is concerning!) that you should be aware of before investing here.

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.