Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Brother Enterprises Holding Co.,Ltd. (SZSE:002562) does carry debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Brother Enterprises HoldingLtd Carry?
As you can see below, at the end of March 2024, Brother Enterprises HoldingLtd had CN¥1.76b of debt, up from CN¥1.39b a year ago. Click the image for more detail. However, it does have CN¥355.0m in cash offsetting this, leading to net debt of about CN¥1.40b.
A Look At Brother Enterprises HoldingLtd's Liabilities
We can see from the most recent balance sheet that Brother Enterprises HoldingLtd had liabilities of CN¥2.62b falling due within a year, and liabilities of CN¥196.6m due beyond that. Offsetting this, it had CN¥355.0m in cash and CN¥528.0m in receivables that were due within 12 months. So its liabilities total CN¥1.93b more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since Brother Enterprises HoldingLtd has a market capitalization of CN¥4.10b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Brother Enterprises HoldingLtd 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, Brother Enterprises HoldingLtd made a loss at the EBIT level, and saw its revenue drop to CN¥3.0b, which is a fall of 7.6%. We would much prefer see growth.
Caveat Emptor
Over the last twelve months Brother Enterprises HoldingLtd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥141m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥350m of cash over the last year. So in short it's a really risky stock. 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. To that end, you should be aware of the 1 warning sign we've spotted with Brother Enterprises HoldingLtd .
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.