Asterisk (TSE:6522) Is Carrying A Fair Bit 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. We note that Asterisk Inc. (TSE:6522) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Asterisk

What Is Asterisk's Debt?

The image below, which you can click on for greater detail, shows that at May 2024 Asterisk had debt of JP¥759.0m, up from JP¥500.0m in one year. On the flip side, it has JP¥392.0m in cash leading to net debt of about JP¥367.0m.

How Strong Is Asterisk's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Asterisk had liabilities of JP¥1.02b due within 12 months and liabilities of JP¥77.0m due beyond that. Offsetting this, it had JP¥392.0m in cash and JP¥365.0m in receivables that were due within 12 months. So its liabilities total JP¥342.0m more than the combination of its cash and short-term receivables.

Since publicly traded Asterisk shares are worth a total of JP¥3.81b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is Asterisk'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.

In the last year Asterisk had a loss before interest and tax, and actually shrunk its revenue by 9.5%, to JP¥1.6b. That's not what we would hope to see.

Caveat Emptor

Importantly, Asterisk had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost JP¥278m 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. Another cause for caution is that is bled JP¥549m in negative free cash flow over the last twelve months. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Asterisk (of which 3 are a bit concerning!) 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.