Is WHY HOW DO COMPANY (TSE:3823) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies THE WHY HOW DO COMPANY, Inc. (TSE:3823) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 WHY HOW DO COMPANY

How Much Debt Does WHY HOW DO COMPANY Carry?

You can click the graphic below for the historical numbers, but it shows that WHY HOW DO COMPANY had JP¥564.0m of debt in November 2024, down from JP¥852.0m, one year before. However, it does have JP¥733.0m in cash offsetting this, leading to net cash of JP¥169.0m.

A Look At WHY HOW DO COMPANY's Liabilities

According to the last reported balance sheet, WHY HOW DO COMPANY had liabilities of JP¥329.0m due within 12 months, and liabilities of JP¥589.0m due beyond 12 months. Offsetting this, it had JP¥733.0m in cash and JP¥187.0m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that WHY HOW DO COMPANY'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¥14.9b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, WHY HOW DO COMPANY boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is WHY HOW DO COMPANY'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, WHY HOW DO COMPANY reported revenue of JP¥968m, which is a gain of 8.4%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is WHY HOW DO COMPANY?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that WHY HOW DO COMPANY had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of JP¥843m and booked a JP¥939m accounting loss. Given it only has net cash of JP¥169.0m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with WHY HOW DO COMPANY (including 2 which are significant) .

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.