These 4 Measures Indicate That Yappli (TSE:4168) Is Using Debt Safely

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 Yappli, Inc. (TSE:4168) makes use of debt. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Yappli Carry?

As you can see below, at the end of December 2024, Yappli had JP¥1.36b of debt, up from JP¥793.0m a year ago. Click the image for more detail. However, it does have JP¥1.96b in cash offsetting this, leading to net cash of JP¥598.0m.

How Healthy Is Yappli's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Yappli had liabilities of JP¥744.0m due within 12 months and liabilities of JP¥1.14b due beyond that. Offsetting these obligations, it had cash of JP¥1.96b as well as receivables valued at JP¥651.0m due within 12 months. So it actually has JP¥730.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Yappli could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Yappli boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Yappli

Even more impressive was the fact that Yappli grew its EBIT by 108% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Yappli will need earnings to service that debt. 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 .

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Yappli 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. In the last two years, Yappli's free cash flow amounted to 23% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Yappli has JP¥598.0m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 108% over the last year. So we don't think Yappli's use of debt is risky. 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 3 warning signs we've spotted with Yappli (including 1 which is a bit unpleasant) .

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.