Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, CAICA Inc. (TYO:2315) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. 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. 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.
See our latest analysis for CAICA
How Much Debt Does CAICA Carry?
You can click the graphic below for the historical numbers, but it shows that CAICA had JP¥1.21b of debt in October 2020, down from JP¥3.21b, one year before. But it also has JP¥5.07b in cash to offset that, meaning it has JP¥3.86b net cash.
How Strong Is CAICA's Balance Sheet?
According to the last reported balance sheet, CAICA had liabilities of JP¥1.13b due within 12 months, and liabilities of JP¥930.0m due beyond 12 months. Offsetting this, it had JP¥5.07b in cash and JP¥840.0m in receivables that were due within 12 months. So it actually has JP¥3.86b more liquid assets than total liabilities.
This surplus strongly suggests that CAICA has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, CAICA 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 it is CAICA'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.
Over 12 months, CAICA made a loss at the EBIT level, and saw its revenue drop to JP¥6.0b, which is a fall of 21%. To be frank that doesn't bode well.
So How Risky Is CAICA?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year CAICA had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through JP¥695m of cash and made a loss of JP¥557m. With only JP¥3.86b on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. For example, we've discovered 1 warning sign for CAICA that you should be aware of before investing here.
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. 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.
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About TSE:2315
Excellent balance sheet slight.
