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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. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies DYNAM JAPAN HOLDINGS Co., Ltd. (HKG:6889) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for DYNAM JAPAN HOLDINGS
What Is DYNAM JAPAN HOLDINGS's Debt?
As you can see below, DYNAM JAPAN HOLDINGS had JP¥2.63b of debt at March 2019, down from JP¥9.15b a year prior. However, it does have JP¥47.5b in cash offsetting this, leading to net cash of JP¥44.9b.
How Healthy Is DYNAM JAPAN HOLDINGS's Balance Sheet?
We can see from the most recent balance sheet that DYNAM JAPAN HOLDINGS had liabilities of JP¥36.5b falling due within a year, and liabilities of JP¥7.08b due beyond that. Offsetting this, it had JP¥47.5b in cash and JP¥695.0m in receivables that were due within 12 months. So it actually has JP¥4.70b more liquid assets than total liabilities.
This surplus suggests that DYNAM JAPAN HOLDINGS has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that DYNAM JAPAN HOLDINGS has more cash than debt is arguably a good indication that it can manage its debt safely.
Also good is that DYNAM JAPAN HOLDINGS grew its EBIT at 20% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if DYNAM JAPAN HOLDINGS can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.