We Think Wintest (TSE:6721) Has A Fair Chunk Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Wintest Corp. (TSE:6721) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Wintest

How Much Debt Does Wintest Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Wintest had JP¥244.0m of debt, an increase on JP¥176.0m, over one year. On the flip side, it has JP¥193.0m in cash leading to net debt of about JP¥51.0m.

How Healthy Is Wintest's Balance Sheet?

According to the last reported balance sheet, Wintest had liabilities of JP¥267.0m due within 12 months, and liabilities of JP¥130.0m due beyond 12 months. On the other hand, it had cash of JP¥193.0m and JP¥38.0m worth of receivables due within a year. So it has liabilities totalling JP¥166.0m more than its cash and near-term receivables, combined.

Given Wintest has a market capitalization of JP¥3.49b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. But either way, Wintest has virtually no net debt, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Wintest'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 Wintest wasn't profitable at an EBIT level, but managed to grow its revenue by 51%, to JP¥506m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Wintest still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable JP¥587m at the EBIT level. 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled JP¥420m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Wintest (1 is concerning!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.