Japan Foundation Engineering (TSE:1914) Has A Rock Solid Balance Sheet

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Japan Foundation Engineering Co., Ltd. (TSE:1914) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Japan Foundation Engineering

How Much Debt Does Japan Foundation Engineering Carry?

As you can see below, at the end of June 2024, Japan Foundation Engineering had JP¥4.10b of debt, up from JP¥3.10b a year ago. Click the image for more detail. But on the other hand it also has JP¥5.77b in cash, leading to a JP¥1.67b net cash position.

A Look At Japan Foundation Engineering's Liabilities

According to the last reported balance sheet, Japan Foundation Engineering had liabilities of JP¥10.1b due within 12 months, and liabilities of JP¥910.0m due beyond 12 months. Offsetting this, it had JP¥5.77b in cash and JP¥7.88b in receivables that were due within 12 months. So it can boast JP¥2.65b more liquid assets than total liabilities.

This excess liquidity suggests that Japan Foundation Engineering is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Japan Foundation Engineering boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Japan Foundation Engineering grew its EBIT by 55% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Japan Foundation Engineering's earnings that will influence how the balance sheet holds up in the future. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Japan Foundation Engineering 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. Looking at the most recent three years, Japan Foundation Engineering recorded free cash flow of 33% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Japan Foundation Engineering has JP¥1.67b in net cash and a decent-looking balance sheet. And we liked the look of last year's 55% year-on-year EBIT growth. So we don't think Japan Foundation Engineering's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Japan Foundation Engineering that you should be aware of.

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.