We Think NCXX Group (TYO:6634) Has A Fair Chunk Of Debt

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, NCXX Group Inc. (TYO:6634) does carry debt. But the real question is whether this debt is making the company risky.

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for NCXX Group

What Is NCXX Group's Debt?

The chart below, which you can click on for greater detail, shows that NCXX Group had JP¥1.62b in debt in November 2020; about the same as the year before. However, it does have JP¥1.02b in cash offsetting this, leading to net debt of about JP¥606.0m.

A Look At NCXX Group's Liabilities

We can see from the most recent balance sheet that NCXX Group had liabilities of JP¥2.19b falling due within a year, and liabilities of JP¥1.77b due beyond that. On the other hand, it had cash of JP¥1.02b and JP¥543.0m worth of receivables due within a year. So it has liabilities totalling JP¥2.40b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of JP¥3.10b. 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 it is NCXX Group'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.

In the last year NCXX Group had a loss before interest and tax, and actually shrunk its revenue by 32%, to JP¥6.6b. 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). Indeed, it lost a very considerable JP¥620m at the EBIT level. 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. However, it doesn't help that it burned through JP¥311m of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example NCXX Group has 2 warning signs (and 1 which is concerning) we think 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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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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