Is Techno AlphaLtd (TYO:3089) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Techno Alpha Co.,Ltd. (TYO:3089) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Techno AlphaLtd

How Much Debt Does Techno AlphaLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of November 2020 Techno AlphaLtd had JP¥300.0m of debt, an increase on JP¥200.0m, over one year. But on the other hand it also has JP¥750.0m in cash, leading to a JP¥450.0m net cash position.

A Look At Techno AlphaLtd's Liabilities

We can see from the most recent balance sheet that Techno AlphaLtd had liabilities of JP¥506.0m falling due within a year, and liabilities of JP¥222.0m due beyond that. On the other hand, it had cash of JP¥750.0m and JP¥444.0m worth of receivables due within a year. So it can boast JP¥466.0m more liquid assets than total liabilities.

It's good to see that Techno AlphaLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Techno AlphaLtd boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Techno AlphaLtd'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, Techno AlphaLtd made a loss at the EBIT level, and saw its revenue drop to JP¥2.3b, which is a fall of 32%. That makes us nervous, to say the least.

So How Risky Is Techno AlphaLtd?

While Techno AlphaLtd lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow JP¥341m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. We've identified 2 warning signs with Techno AlphaLtd , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. 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.
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