Is Signpost (TSE:3996) Weighed On By Its Debt Load?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Signpost Corporation (TSE:3996) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Signpost

What Is Signpost's Net Debt?

The image below, which you can click on for greater detail, shows that Signpost had debt of JP¥332.0m at the end of November 2023, a reduction from JP¥487.0m over a year. However, it does have JP¥1.22b in cash offsetting this, leading to net cash of JP¥886.0m.

How Strong Is Signpost's Balance Sheet?

We can see from the most recent balance sheet that Signpost had liabilities of JP¥645.0m falling due within a year, and liabilities of JP¥333.0m due beyond that. Offsetting these obligations, it had cash of JP¥1.22b as well as receivables valued at JP¥496.0m due within 12 months. So it can boast JP¥736.0m more liquid assets than total liabilities.

This surplus suggests that Signpost has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Signpost has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Signpost'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, Signpost reported revenue of JP¥2.8b, which is a gain of 12%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Signpost?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Signpost had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through JP¥143m of cash and made a loss of JP¥39m. But the saving grace is the JP¥886.0m on the balance sheet. That means it could keep spending at its current rate for more than two years. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Signpost (2 are a bit concerning) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.