INCLUSIVE (TSE:7078) Has Debt But No Earnings; Should You Worry?

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. As with many other companies INCLUSIVE Inc. (TSE:7078) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for INCLUSIVE

What Is INCLUSIVE's Debt?

The image below, which you can click on for greater detail, shows that INCLUSIVE had debt of JP¥703.0m at the end of September 2024, a reduction from JP¥908.0m over a year. But it also has JP¥2.21b in cash to offset that, meaning it has JP¥1.51b net cash.

How Healthy Is INCLUSIVE's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that INCLUSIVE had liabilities of JP¥830.0m due within 12 months and liabilities of JP¥890.0m due beyond that. On the other hand, it had cash of JP¥2.21b and JP¥337.0m worth of receivables due within a year. So it actually has JP¥827.0m more liquid assets than total liabilities.

This excess liquidity suggests that INCLUSIVE is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, INCLUSIVE 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 you can't view debt in total isolation; since INCLUSIVE 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.

In the last year INCLUSIVE had a loss before interest and tax, and actually shrunk its revenue by 8.3%, to JP¥5.0b. That's not what we would hope to see.

So How Risky Is INCLUSIVE?

While INCLUSIVE lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of JP¥418m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that INCLUSIVE is showing 3 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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.