Li Lu, an external fund manager backed by Berkshire Hathaway's Charlie Munger, says, “The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.'' It has even been stated. It's only natural to consider a company's balance sheet when you consider how risky it is, since debt is often involved when a business collapses. the important thing is, Direct Marketing MiX Co., Ltd. (TSE: 7354) is in debt. But should shareholders be worried about its use of debt?
When is debt dangerous?
Debt supports a company until the company has difficulty paying it back with new capital or free cash flow. In the worst case scenario, a company may go bankrupt if it is unable to pay its creditors. But a more common (but still expensive) situation is when a company needs to dilute shareholders at a cheap share price just to manage its debt. The advantage of debt, of course, is that it is often cheap capital, especially when it replaces dilution in a company that can be reinvested at a high rate of return. When investigating debt levels, we first consider both cash and debt levels together.
Check out our latest analysis for Direct Marketing MiX.
What is Direct Marketing MiX debt?
As shown below, as of the end of September 2023, Direct Marketing MiX's debt was 5.95 billion yen, up from 517 million yen a year ago. Click on the image for more information. However, it has cash of 5.06 billion yen to offset this, and its net debt is approximately 891 million yen.
How healthy is Direct Marketing MiX's balance sheet?
According to its last reported balance sheet, Direct Marketing MiX had liabilities of ¥7.48 billion due within 12 months, and liabilities of ¥5.7 billion due beyond 12 months. On the other hand, it had cash of 5.06 billion yen and accounts receivable of 3.65 billion yen that were scheduled to be repaid within the year. So its liabilities outweigh the sum of its cash and (short-term) receivables by ¥4.48b.
Direct Marketing MiX has a market capitalization of 14.4 billion yen, so it is very likely that it will raise cash to improve its balance sheet if necessary. However, it's still worth carefully considering the company's ability to repay its debt.
To determine how much debt a company has 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, tax, and amortization (EBIT) divided by its interest expense. (its interest cover). This way, we consider both the absolute amount of debt and the interest rate paid on it.
Direct Marketing MiX has a low net debt to EBITDA ratio of just 0.20. And its EBIT covers its interest expense by a whopping 72.5 times. Therefore, one could argue that elephants are no more threatened by debt than elephants are threatened by rats. The reason Direct Marketing MiX isn't under as much pressure is because its EBIT fell by 46% in the last year. Declining profits (if this trend continues) could eventually make even small amounts of debt very risky. There's no question that we learn most about debt from the balance sheet. But ultimately, Direct Marketing MiX's ability to strengthen its balance sheet over the long term will depend on the future profitability of the business.If you're focused on the future, check this out free A report showing analyst profit forecasts.
Finally, while tax preparers may adore accounting profits, lenders only accept cold hard cash. So it's clear that we need to check whether that EBIT is leading to corresponding free cash flow. Over the last three years, Direct Marketing MiX generated very strong free cash flow representing 83% of its EBIT. This exceeds our expectations. This puts you in a favorable position to pay off your debt if you wish.
our view
Direct Marketing MiX's EBIT growth was materially negative in this analysis, although the other factors we considered were significantly better. I'm especially dazzled by its interest cover. Considering this range of data points, we think Direct Marketing MiX is in a good position to manage its debt levels. However, you need to be careful. Debt levels are considered to be sufficient to warrant continued monitoring. There's no question that we learn most about debt from the balance sheet. But ultimately, any company can contain risks that exist outside the balance sheet. Note that Direct Marketing MiX is shown 4 warning signs in investment analysis One of them doesn't suit us very well…
After all, it may be easier to focus on companies that don't even need to take on debt.Readers can access a list of growth stocks with zero net debt completely freeright now.
Valuation is complex, but we help make it simple.
Check out our comprehensive analysis, including below, to see if Direct Marketing MiX is potentially overvalued or undervalued. Fair value estimates, risks and caveats, dividends, insider trading, and financial health.
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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
