Stock Analysis

Is Recomm (TYO:3323) Weighed On By Its Debt Load?

TSE:3323
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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. Importantly, Recomm Co., Ltd. (TYO:3323) does carry debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Recomm

What Is Recomm's Debt?

The image below, which you can click on for greater detail, shows that Recomm had debt of JP¥1.91b at the end of December 2020, a reduction from JP¥3.52b over a year. But it also has JP¥3.00b in cash to offset that, meaning it has JP¥1.09b net cash.

debt-equity-history-analysis
JASDAQ:3323 Debt to Equity History April 18th 2021

How Healthy Is Recomm's Balance Sheet?

The latest balance sheet data shows that Recomm had liabilities of JP¥2.71b due within a year, and liabilities of JP¥1.11b falling due after that. Offsetting these obligations, it had cash of JP¥3.00b as well as receivables valued at JP¥1.81b due within 12 months. So it can boast JP¥986.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Recomm could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Recomm boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Recomm's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Recomm made a loss at the EBIT level, and saw its revenue drop to JP¥8.4b, which is a fall of 20%. That makes us nervous, to say the least.

So How Risky Is Recomm?

While Recomm lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of JP¥441m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. Be aware that Recomm is showing 4 warning signs in our investment analysis , 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. 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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