CoCreation Grass (SHSE:605099) Seems To Use Debt Rather Sparingly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 CoCreation Grass Co., Ltd (SHSE:605099) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for CoCreation Grass

What Is CoCreation Grass's Net Debt?

As you can see below, CoCreation Grass had CN¥100.0m of debt at September 2024, down from CN¥300.0m a year prior. But on the other hand it also has CN¥934.9m in cash, leading to a CN¥834.9m net cash position.

A Look At CoCreation Grass' Liabilities

We can see from the most recent balance sheet that CoCreation Grass had liabilities of CN¥417.1m falling due within a year, and liabilities of CN¥26.9m due beyond that. Offsetting this, it had CN¥934.9m in cash and CN¥662.0m in receivables that were due within 12 months. So it actually has CN¥1.15b more liquid assets than total liabilities.

This short term liquidity is a sign that CoCreation Grass could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that CoCreation Grass has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that CoCreation Grass has increased its EBIT by 7.7% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if CoCreation Grass can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While CoCreation Grass has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, CoCreation Grass produced sturdy free cash flow equating to 74% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that CoCreation Grass has net cash of CN¥834.9m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥304m, being 74% of its EBIT. So we don't think CoCreation Grass's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in CoCreation Grass, you may well want to click here to check an interactive graph of its earnings per share history.

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.