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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Yappli, Inc. (TSE:4168) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Yappli

What Is Yappli's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Yappli had debt of JP¥1.48b, up from JP¥868.0m in one year. However, its balance sheet shows it holds JP¥1.80b in cash, so it actually has JP¥321.0m net cash.

A Look At Yappli's Liabilities

We can see from the most recent balance sheet that Yappli had liabilities of JP¥837.0m falling due within a year, and liabilities of JP¥1.25b due beyond that. Offsetting this, it had JP¥1.80b in cash and JP¥588.0m in receivables that were due within 12 months. So it actually has JP¥304.0m 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. Simply put, the fact that Yappli has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Yappli made a loss at the EBIT level, last year, it was also good to see that it generated JP¥435m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Yappli's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Yappli may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last year, Yappli burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Yappli has JP¥321.0m in net cash and a decent-looking balance sheet. So we are not troubled with Yappli's debt use. 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. For instance, we've identified 4 warning signs for Yappli (1 is concerning) you should be aware of.

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.