Is SHIFT (TSE:3697) A Risky Investment?

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.' 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. As with many other companies SHIFT Inc. (TSE:3697) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for SHIFT

What Is SHIFT's Net Debt?

As you can see below, at the end of November 2024, SHIFT had JP¥12.8b of debt, up from JP¥10.6b a year ago. Click the image for more detail. But on the other hand it also has JP¥24.4b in cash, leading to a JP¥11.6b net cash position.

A Look At SHIFT's Liabilities

We can see from the most recent balance sheet that SHIFT had liabilities of JP¥22.8b falling due within a year, and liabilities of JP¥7.85b due beyond that. Offsetting this, it had JP¥24.4b in cash and JP¥13.5b in receivables that were due within 12 months. So it can boast JP¥7.29b more liquid assets than total liabilities.

This short term liquidity is a sign that SHIFT could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, SHIFT boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, SHIFT grew its EBIT by 5.8% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if SHIFT can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. SHIFT may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, SHIFT produced sturdy free cash flow equating to 54% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that SHIFT has net cash of JP¥11.6b, as well as more liquid assets than liabilities. So we don't think SHIFT's use of debt is risky. 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, we've discovered 1 warning sign for SHIFT 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.