Is DEPPON LOGISTICS (SHSE:603056) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that DEPPON LOGISTICS Co., LTD. (SHSE:603056) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for DEPPON LOGISTICS

How Much Debt Does DEPPON LOGISTICS Carry?

The image below, which you can click on for greater detail, shows that at March 2024 DEPPON LOGISTICS had debt of CN¥2.63b, up from CN¥2.47b in one year. However, it does have CN¥3.36b in cash offsetting this, leading to net cash of CN¥729.2m.

How Strong Is DEPPON LOGISTICS' Balance Sheet?

We can see from the most recent balance sheet that DEPPON LOGISTICS had liabilities of CN¥7.92b falling due within a year, and liabilities of CN¥1.71b due beyond that. On the other hand, it had cash of CN¥3.36b and CN¥3.64b worth of receivables due within a year. So it has liabilities totalling CN¥2.64b more than its cash and near-term receivables, combined.

Given DEPPON LOGISTICS has a market capitalization of CN¥16.9b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, DEPPON LOGISTICS boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that DEPPON LOGISTICS grew its EBIT by 11% last year, making its debt load easier to handle. 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 DEPPON LOGISTICS 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. DEPPON LOGISTICS may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, DEPPON LOGISTICS actually produced more free cash flow than EBIT over the last two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While DEPPON LOGISTICS does have more liabilities than liquid assets, it also has net cash of CN¥729.2m. And it impressed us with free cash flow of CN¥2.4b, being 312% of its EBIT. So we don't think DEPPON LOGISTICS's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for DEPPON LOGISTICS that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.