Is Japan Display (TSE:6740) Using Debt Sensibly?

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 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 can see that Japan Display Inc. (TSE:6740) 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 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

Check out our latest analysis for Japan Display

How Much Debt Does Japan Display Carry?

As you can see below, at the end of June 2024, Japan Display had JP¥33.5b of debt, up from JP¥12.0b a year ago. Click the image for more detail. However, it does have JP¥33.9b in cash offsetting this, leading to net cash of JP¥415.0m.

How Healthy Is Japan Display's Balance Sheet?

We can see from the most recent balance sheet that Japan Display had liabilities of JP¥123.5b falling due within a year, and liabilities of JP¥7.87b due beyond that. Offsetting these obligations, it had cash of JP¥33.9b as well as receivables valued at JP¥40.1b due within 12 months. So it has liabilities totalling JP¥57.3b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Japan Display has a market capitalization of JP¥130.0b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Japan Display boasts net cash, 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 you can't view debt in total isolation; since Japan Display 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.

In the last year Japan Display had a loss before interest and tax, and actually shrunk its revenue by 9.2%, to JP¥242b. That's not what we would hope to see.

So How Risky Is Japan Display?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Japan Display had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through JP¥15b of cash and made a loss of JP¥39b. However, it has net cash of JP¥415.0m, so it has a bit of time before it will need more capital. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. Case in point: We've spotted 1 warning sign for Japan Display you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.