Health Check: How Prudently Does NCXX Group (TYO:6634) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that NCXX Group Inc. (TYO:6634) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

View our latest analysis for NCXX Group

How Much Debt Does NCXX Group Carry?

You can click the graphic below for the historical numbers, but it shows that NCXX Group had JP¥1.65b of debt in August 2020, down from JP¥1.82b, one year before. However, it also had JP¥1.07b in cash, and so its net debt is JP¥571.0m.

A Look At NCXX Group's Liabilities

According to the last reported balance sheet, NCXX Group had liabilities of JP¥2.22b due within 12 months, and liabilities of JP¥1.90b due beyond 12 months. On the other hand, it had cash of JP¥1.07b and JP¥599.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥2.45b.

This is a mountain of leverage relative to its market capitalization of JP¥2.53b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since NCXX Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year NCXX Group had a loss before interest and tax, and actually shrunk its revenue by 21%, to JP¥7.6b. That makes us nervous, to say the least.

Caveat Emptor

Not only did NCXX Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping JP¥484m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled JP¥448m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for NCXX Group (of which 1 shouldn't be ignored!) you should know about.

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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