We Think DEPPON LOGISTICS (SHSE:603056) Can Manage Its Debt With Ease

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies DEPPON LOGISTICS Co., LTD. (SHSE:603056) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for DEPPON LOGISTICS

What Is DEPPON LOGISTICS's Net Debt?

As you can see below, DEPPON LOGISTICS had CN¥1.78b of debt at September 2024, down from CN¥2.67b a year prior. But it also has CN¥3.14b in cash to offset that, meaning it has CN¥1.36b net cash.

How Healthy Is DEPPON LOGISTICS' Balance Sheet?

The latest balance sheet data shows that DEPPON LOGISTICS had liabilities of CN¥6.85b due within a year, and liabilities of CN¥1.78b falling due after that. On the other hand, it had cash of CN¥3.14b and CN¥3.96b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.53b.

Of course, DEPPON LOGISTICS has a market capitalization of CN¥13.9b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, DEPPON LOGISTICS also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that DEPPON LOGISTICS grew its EBIT at 20% over the last year, further increasing its ability to manage debt. 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 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While DEPPON LOGISTICS 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. Over the last three years, DEPPON LOGISTICS actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although DEPPON LOGISTICS's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥1.36b. The cherry on top was that in converted 303% of that EBIT to free cash flow, bringing in CN¥2.2b. So is DEPPON LOGISTICS's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that DEPPON LOGISTICS is showing 1 warning sign in our investment analysis , you should know about...

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.