The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We can see that Remixpoint, Inc. (TSE:3825) does use debt in its business. But is this debt a concern to shareholders?
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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Remixpoint
How Much Debt Does Remixpoint Carry?
The image below, which you can click on for greater detail, shows that at March 2024 Remixpoint had debt of JP¥615.0m, up from none in one year. However, its balance sheet shows it holds JP¥13.6b in cash, so it actually has JP¥13.0b net cash.
How Strong Is Remixpoint's Balance Sheet?
According to the last reported balance sheet, Remixpoint had liabilities of JP¥1.32b due within 12 months, and liabilities of JP¥423.0m due beyond 12 months. On the other hand, it had cash of JP¥13.6b and JP¥3.49b worth of receivables due within a year. So it actually has JP¥15.3b more liquid assets than total liabilities.
This surplus liquidity suggests that Remixpoint's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Remixpoint boasts net cash, so it's fair to say it does not have a heavy debt load!
It was also good to see that despite losing money on the EBIT line last year, Remixpoint turned things around in the last 12 months, delivering and EBIT of JP¥1.7b. There's no doubt that we learn most about debt from the balance sheet. But it is Remixpoint'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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Remixpoint 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 year, Remixpoint 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 we empathize with investors who find debt concerning, you should keep in mind that Remixpoint has net cash of JP¥13.0b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥2.4b, being 138% of its EBIT. So we don't think Remixpoint's use of debt is risky. 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. For example, we've discovered 3 warning signs for Remixpoint that you should be aware of before investing here.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.
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About TSE:3825
Remixpoint
Engages in the development and sale of energy management systems and energy-saving support consulting services in Japan.
Flawless balance sheet low.