Is 4Cs HD (TSE:3726) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies 4Cs HD Co., Ltd. (TSE:3726) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for 4Cs HD

What Is 4Cs HD's Debt?

As you can see below, 4Cs HD had JP¥668.0m of debt at June 2024, down from JP¥791.0m a year prior. But it also has JP¥1.21b in cash to offset that, meaning it has JP¥538.0m net cash.

A Look At 4Cs HD's Liabilities

We can see from the most recent balance sheet that 4Cs HD had liabilities of JP¥630.0m falling due within a year, and liabilities of JP¥341.0m due beyond that. Offsetting these obligations, it had cash of JP¥1.21b as well as receivables valued at JP¥140.0m due within 12 months. So it actually has JP¥375.0m more liquid assets than total liabilities.

This surplus suggests that 4Cs HD has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, 4Cs HD boasts net cash, so it's fair to say it does not have a heavy debt load! 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 4Cs HD 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 4Cs HD wasn't profitable at an EBIT level, but managed to grow its revenue by 6.4%, to JP¥2.2b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is 4Cs HD?

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 4Cs HD 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¥147m and booked a JP¥204m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of JP¥538.0m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - 4Cs HD has 2 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.