Is Daiwa Motor Transportation (TSE:9082) Using Debt In A Risky Way?

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 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 Daiwa Motor Transportation Co., Ltd. (TSE:9082) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Daiwa Motor Transportation

What Is Daiwa Motor Transportation's Debt?

The chart below, which you can click on for greater detail, shows that Daiwa Motor Transportation had JP¥13.7b in debt in September 2024; about the same as the year before. On the flip side, it has JP¥5.44b in cash leading to net debt of about JP¥8.26b.

A Look At Daiwa Motor Transportation's Liabilities

The latest balance sheet data shows that Daiwa Motor Transportation had liabilities of JP¥8.23b due within a year, and liabilities of JP¥12.4b falling due after that. On the other hand, it had cash of JP¥5.44b and JP¥1.60b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥13.6b.

This deficit casts a shadow over the JP¥3.66b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Daiwa Motor Transportation would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Daiwa Motor Transportation 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.

Over 12 months, Daiwa Motor Transportation saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Daiwa Motor Transportation produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping JP¥380m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it lost JP¥447m in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. 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 3 warning signs for Daiwa Motor Transportation (2 are concerning) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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

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.