Is Ichikura (TSE:6186) Using Debt In A Risky Way?

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. We can see that Ichikura Co., Ltd. (TSE:6186) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Ichikura

What Is Ichikura's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Ichikura had JP¥6.14b of debt, an increase on JP¥5.58b, over one year. However, it does have JP¥4.68b in cash offsetting this, leading to net debt of about JP¥1.46b.

How Strong Is Ichikura's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ichikura had liabilities of JP¥13.5b due within 12 months and liabilities of JP¥3.01b due beyond that. On the other hand, it had cash of JP¥4.68b and JP¥834.0m worth of receivables due within a year. So its liabilities total JP¥11.0b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the JP¥2.30b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Ichikura would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Ichikura 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 Ichikura had a loss before interest and tax, and actually shrunk its revenue by 2.4%, to JP¥20b. We would much prefer see growth.

Caveat Emptor

Importantly, Ichikura had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at JP¥144m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through JP¥508m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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. We've identified 4 warning signs with Ichikura , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.