Health Check: How Prudently Does River Eletec (TSE:6666) Use Debt?

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.' 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 River Eletec Corporation (TSE:6666) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is River Eletec's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 River Eletec had JP¥4.74b of debt, an increase on JP¥4.34b, over one year. However, because it has a cash reserve of JP¥2.72b, its net debt is less, at about JP¥2.02b.

How Strong Is River Eletec's Balance Sheet?

We can see from the most recent balance sheet that River Eletec had liabilities of JP¥3.03b falling due within a year, and liabilities of JP¥3.14b due beyond that. On the other hand, it had cash of JP¥2.72b and JP¥1.03b worth of receivables due within a year. So it has liabilities totalling JP¥2.42b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of JP¥2.87b, so it does suggest shareholders should keep an eye on River Eletec's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since River Eletec 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 .

View our latest analysis for River Eletec

In the last year River Eletec's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months River Eletec produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at JP¥179m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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¥426m 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 River Eletec has 4 warning signs (and 3 which are potentially serious) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.