Is ELEMENTS (TSE:5246) Using Debt In A Risky Way?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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, ELEMENTS, Inc. (TSE:5246) does carry debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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, 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 ELEMENTS

How Much Debt Does ELEMENTS Carry?

The image below, which you can click on for greater detail, shows that at November 2023 ELEMENTS had debt of JP¥2.38b, up from JP¥1.43b in one year. But on the other hand it also has JP¥2.79b in cash, leading to a JP¥412.0m net cash position.

How Healthy Is ELEMENTS' Balance Sheet?

The latest balance sheet data shows that ELEMENTS had liabilities of JP¥876.0m due within a year, and liabilities of JP¥1.74b falling due after that. Offsetting these obligations, it had cash of JP¥2.79b as well as receivables valued at JP¥359.0m due within 12 months. So it can boast JP¥539.0m more liquid assets than total liabilities.

This surplus suggests that ELEMENTS has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, ELEMENTS boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is ELEMENTS'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, ELEMENTS reported revenue of JP¥1.9b, which is a gain of 18%, 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 ELEMENTS?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months ELEMENTS lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through JP¥504m of cash and made a loss of JP¥338m. While this does make the company a bit risky, it's important to remember it has net cash of JP¥412.0m. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for ELEMENTS (of which 1 is significant!) you should know about.

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.

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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.