We Think AKIBA HoldingsLtd (TYO:6840) Can Stay On Top Of Its 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 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. We can see that AKIBA Holdings Co.,Ltd. (TYO:6840) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for AKIBA HoldingsLtd

What Is AKIBA HoldingsLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 AKIBA HoldingsLtd had JP¥3.54b of debt, an increase on JP¥3.16b, over one year. However, because it has a cash reserve of JP¥3.28b, its net debt is less, at about JP¥262.0m.

A Look At AKIBA HoldingsLtd's Liabilities

According to the last reported balance sheet, AKIBA HoldingsLtd had liabilities of JP¥4.69b due within 12 months, and liabilities of JP¥534.0m due beyond 12 months. Offsetting these obligations, it had cash of JP¥3.28b as well as receivables valued at JP¥2.68b due within 12 months. So it can boast JP¥726.0m more liquid assets than total liabilities.

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

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

AKIBA HoldingsLtd's net debt is only 0.41 times its EBITDA. And its EBIT covers its interest expense a whopping 44.6 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On the other hand, AKIBA HoldingsLtd's EBIT dived 19%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But it is AKIBA HoldingsLtd'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, AKIBA HoldingsLtd recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Our View

AKIBA HoldingsLtd's interest cover was a real positive on this analysis, as was its net debt to EBITDA. But truth be told its EBIT growth rate had us nibbling our nails. When we consider all the factors mentioned above, we do feel a bit cautious about AKIBA HoldingsLtd's use of debt. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. 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. Be aware that AKIBA HoldingsLtd is showing 4 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

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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