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. Importantly, U-NEXT HOLDINGS Co.,Ltd. (TSE:9418) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for U-NEXT HOLDINGSLtd
What Is U-NEXT HOLDINGSLtd's Net Debt?
As you can see below, U-NEXT HOLDINGSLtd had JP¥62.9b of debt, at August 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have JP¥52.7b in cash offsetting this, leading to net debt of about JP¥10.2b.
A Look At U-NEXT HOLDINGSLtd's Liabilities
According to the last reported balance sheet, U-NEXT HOLDINGSLtd had liabilities of JP¥71.5b due within 12 months, and liabilities of JP¥65.4b due beyond 12 months. Offsetting this, it had JP¥52.7b in cash and JP¥40.9b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥43.3b.
Of course, U-NEXT HOLDINGSLtd has a market capitalization of JP¥301.4b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
U-NEXT HOLDINGSLtd has a low net debt to EBITDA ratio of only 0.26. And its EBIT easily covers its interest expense, being 56.1 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On top of that, U-NEXT HOLDINGSLtd grew its EBIT by 34% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine U-NEXT HOLDINGSLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. In the last three years, U-NEXT HOLDINGSLtd's free cash flow amounted to 30% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Our View
Happily, U-NEXT HOLDINGSLtd's impressive interest cover implies it has the upper hand on its debt. But, on a more sombre note, we are a little concerned by its conversion of EBIT to free cash flow. Zooming out, U-NEXT HOLDINGSLtd seems to use debt quite reasonably; and that gets the nod from us. After all, sensible leverage can boost returns on equity. Over time, share prices tend to follow earnings per share, so if you're interested in U-NEXT HOLDINGSLtd, you may well want to click here to check an interactive graph of its earnings per share history.
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.
About TSE:9418
Flawless balance sheet with solid track record.
