Health Check: How Prudently Does V-cube (TSE:3681) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies V-cube, Inc. (TSE:3681) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

See our latest analysis for V-cube

How Much Debt Does V-cube Carry?

As you can see below, V-cube had JP¥7.79b of debt at September 2024, down from JP¥8.66b a year prior. However, because it has a cash reserve of JP¥1.49b, its net debt is less, at about JP¥6.30b.

How Strong Is V-cube's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that V-cube had liabilities of JP¥6.69b due within 12 months and liabilities of JP¥3.97b due beyond that. Offsetting this, it had JP¥1.49b in cash and JP¥1.30b in receivables that were due within 12 months. So it has liabilities totalling JP¥7.87b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's JP¥5.58b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But it is V-cube's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, V-cube made a loss at the EBIT level, and saw its revenue drop to JP¥11b, which is a fall of 4.2%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months V-cube produced an earnings before interest and tax (EBIT) loss. Indeed, it lost JP¥89m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through JP¥1.0b in negative free cash flow over the last year. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for V-cube you should be aware of, and 1 of them shouldn't be ignored.

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.