SHIFT (TSE:3697) Could Easily Take On More Debt

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, SHIFT Inc. (TSE:3697) does carry debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for SHIFT

How Much Debt Does SHIFT Carry?

As you can see below, at the end of November 2023, SHIFT had JP¥10.6b of debt, up from JP¥6.25b a year ago. Click the image for more detail. But on the other hand it also has JP¥19.7b in cash, leading to a JP¥9.15b net cash position.

How Healthy Is SHIFT's Balance Sheet?

We can see from the most recent balance sheet that SHIFT had liabilities of JP¥21.3b falling due within a year, and liabilities of JP¥1.55b due beyond that. On the other hand, it had cash of JP¥19.7b and JP¥11.1b worth of receivables due within a year. So it can boast JP¥7.97b more liquid assets than total liabilities.

This state of affairs indicates that SHIFT's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the JP¥459.1b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that SHIFT has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, SHIFT grew its EBIT by 72% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. 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 generated free cash flow amounting to a very robust 85% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case SHIFT has JP¥9.15b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥9.0b, being 85% of its EBIT. So is SHIFT's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that SHIFT is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.