Is Showcase (TSE:3909) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Showcase Inc. (TSE:3909) makes use of debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out our latest analysis for Showcase

How Much Debt Does Showcase Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Showcase had JP¥1.88b of debt, an increase on JP¥1.35b, over one year. However, it does have JP¥1.14b in cash offsetting this, leading to net debt of about JP¥735.0m.

How Healthy Is Showcase's Balance Sheet?

We can see from the most recent balance sheet that Showcase had liabilities of JP¥1.38b falling due within a year, and liabilities of JP¥904.0m due beyond that. On the other hand, it had cash of JP¥1.14b and JP¥696.0m worth of receivables due within a year. So it has liabilities totalling JP¥447.0m more than its cash and near-term receivables, combined.

Showcase has a market capitalization of JP¥2.22b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Showcase will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Showcase made a loss at the EBIT level, and saw its revenue drop to JP¥5.6b, which is a fall of 3.7%. We would much prefer see growth.

Caveat Emptor

Importantly, Showcase had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable JP¥280m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through JP¥460m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Showcase (including 1 which is a bit concerning) .

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.