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 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. We note that e-LogiT co.,ltd. (TSE:9327) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for e-LogiTltd
How Much Debt Does e-LogiTltd Carry?
The image below, which you can click on for greater detail, shows that at December 2023 e-LogiTltd had debt of JP¥1.84b, up from JP¥1.16b in one year. However, it does have JP¥772.0m in cash offsetting this, leading to net debt of about JP¥1.07b.
How Strong Is e-LogiTltd's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that e-LogiTltd had liabilities of JP¥3.67b due within 12 months and liabilities of JP¥1.39b due beyond that. Offsetting this, it had JP¥772.0m in cash and JP¥2.02b in receivables that were due within 12 months. So its liabilities total JP¥2.26b more than the combination of its cash and short-term receivables.
When you consider that this deficiency exceeds the company's JP¥2.26b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is e-LogiTltd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, e-LogiTltd saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.
Caveat Emptor
Importantly, e-LogiTltd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable JP¥765m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of JP¥653m over the last twelve months. So suffice it to say we consider the stock to be risky. 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. We've identified 4 warning signs with e-LogiTltd (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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:9327
Moderate and slightly overvalued.
