Recomm (TYO:3323) 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Recomm Co., Ltd. (TYO:3323) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 examine debt levels, we first consider both cash and debt levels, 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¥2.17b at the end of September 2020, a reduction from JP¥3.38b over a year. But on the other hand it also has JP¥3.48b in cash, leading to a JP¥1.31b net cash position.

A Look At Recomm's Liabilities

We can see from the most recent balance sheet that Recomm had liabilities of JP¥3.28b falling due within a year, and liabilities of JP¥1.24b due beyond that. Offsetting these obligations, it had cash of JP¥3.48b as well as receivables valued at JP¥2.12b due within 12 months. So it can boast JP¥1.08b more liquid assets than total liabilities.

This surplus suggests that Recomm has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Recomm 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 Recomm 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.

Over 12 months, Recomm made a loss at the EBIT level, and saw its revenue drop to JP¥8.7b, which is a fall of 11%. We would much prefer see growth.

So How Risky Is Recomm?

Although Recomm had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of JP¥327m. 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. 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. For example, we've discovered 5 warning signs for Recomm (1 doesn't sit too well with us!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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