Is E-SUPPORTLINK (TYO:2493) A Risky Investment?

Warren Buffett famously said, '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 E-SUPPORTLINK, Ltd. (TYO:2493) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for E-SUPPORTLINK

What Is E-SUPPORTLINK's Debt?

As you can see below, E-SUPPORTLINK had JP¥163.0m of debt at November 2020, down from JP¥233.0m a year prior. However, its balance sheet shows it holds JP¥3.01b in cash, so it actually has JP¥2.85b net cash.

How Strong Is E-SUPPORTLINK's Balance Sheet?

According to the last reported balance sheet, E-SUPPORTLINK had liabilities of JP¥841.0m due within 12 months, and liabilities of JP¥546.0m due beyond 12 months. Offsetting this, it had JP¥3.01b in cash and JP¥647.0m in receivables that were due within 12 months. So it can boast JP¥2.27b more liquid assets than total liabilities.

This luscious liquidity implies that E-SUPPORTLINK's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, E-SUPPORTLINK boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, E-SUPPORTLINK grew its EBIT by 9.7% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But it is E-SUPPORTLINK's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While E-SUPPORTLINK has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, E-SUPPORTLINK actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case E-SUPPORTLINK has JP¥2.85b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 139% of that EBIT to free cash flow, bringing in JP¥205m. When it comes to E-SUPPORTLINK's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with E-SUPPORTLINK (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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. 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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