These 4 Measures Indicate That Asahi Kogyosha (TSE:1975) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Asahi Kogyosha Co., Ltd. (TSE:1975) does carry debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Asahi Kogyosha

How Much Debt Does Asahi Kogyosha Carry?

As you can see below, Asahi Kogyosha had JP¥3.30b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has JP¥18.8b in cash, leading to a JP¥15.5b net cash position.

How Healthy Is Asahi Kogyosha's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Asahi Kogyosha had liabilities of JP¥43.7b due within 12 months and liabilities of JP¥1.58b due beyond that. Offsetting these obligations, it had cash of JP¥18.8b as well as receivables valued at JP¥41.7b due within 12 months. So it actually has JP¥15.2b more liquid assets than total liabilities.

This excess liquidity is a great indication that Asahi Kogyosha's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Asahi Kogyosha has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Asahi Kogyosha grew its EBIT by 69% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Asahi Kogyosha 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, a company can only pay off debt with cold hard cash, not accounting profits. While Asahi Kogyosha 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 most recent three years, Asahi Kogyosha recorded free cash flow worth 50% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Asahi Kogyosha has JP¥15.5b in net cash and a decent-looking balance sheet. And we liked the look of last year's 69% year-on-year EBIT growth. When it comes to Asahi Kogyosha's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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. To that end, you should be aware of the 1 warning sign we've spotted with Asahi Kogyosha .

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.

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