AKIBA HoldingsLtd (TSE:6840) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that AKIBA Holdings Co.,Ltd. (TSE:6840) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for AKIBA HoldingsLtd

How Much Debt Does AKIBA HoldingsLtd Carry?

As you can see below, at the end of March 2024, AKIBA HoldingsLtd had JP¥5.25b of debt, up from JP¥4.27b a year ago. Click the image for more detail. However, it also had JP¥4.17b in cash, and so its net debt is JP¥1.08b.

A Look At AKIBA HoldingsLtd's Liabilities

According to the last reported balance sheet, AKIBA HoldingsLtd had liabilities of JP¥6.31b due within 12 months, and liabilities of JP¥1.36b due beyond 12 months. Offsetting this, it had JP¥4.17b in cash and JP¥4.68b in receivables that were due within 12 months. So it actually has JP¥1.18b more liquid assets than total liabilities.

This excess liquidity is a great indication that AKIBA HoldingsLtd's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

AKIBA HoldingsLtd has a low net debt to EBITDA ratio of only 1.1. And its EBIT easily covers its interest expense, being 39.9 times the size. So we're pretty relaxed about its super-conservative use of debt. It is just as well that AKIBA HoldingsLtd's load is not too heavy, because its EBIT was down 21% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since AKIBA HoldingsLtd 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Considering the last three years, AKIBA HoldingsLtd actually recorded a cash outflow, overall. 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 EBIT growth rate was a real negative on this analysis, as was its conversion of EBIT to free cash flow. But its interest cover was significantly redeeming. Looking at all this data makes us feel a little cautious about AKIBA HoldingsLtd's debt levels. While debt does have its upside in higher potential returns, we think shareholders should definitely consider how debt levels might make the stock more risky. 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 instance, we've identified 4 warning signs for AKIBA HoldingsLtd that 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.

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