Is Mitsuchi (TSE:3439) 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 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. We note that Mitsuchi Corporation (TSE:3439) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Mitsuchi

How Much Debt Does Mitsuchi Carry?

You can click the graphic below for the historical numbers, but it shows that Mitsuchi had JP¥3.55b of debt in March 2024, down from JP¥3.99b, one year before. But it also has JP¥4.22b in cash to offset that, meaning it has JP¥670.0m net cash.

A Look At Mitsuchi's Liabilities

According to the last reported balance sheet, Mitsuchi had liabilities of JP¥4.77b due within 12 months, and liabilities of JP¥1.90b due beyond 12 months. Offsetting this, it had JP¥4.22b in cash and JP¥2.89b in receivables that were due within 12 months. So it can boast JP¥439.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Mitsuchi could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Mitsuchi boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Mitsuchi turned things around in the last 12 months, delivering and EBIT of JP¥445m. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Mitsuchi 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Mitsuchi 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. Happily for any shareholders, Mitsuchi actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Mitsuchi has net cash of JP¥670.0m, as well as more liquid assets than liabilities. The cherry on top was that in converted 122% of that EBIT to free cash flow, bringing in JP¥545m. So we don't think Mitsuchi's use of debt is risky. 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. We've identified 3 warning signs with Mitsuchi (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com