Is Waida Mfg.Ltd (TSE:6158) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Waida Mfg. Co.,Ltd. (TSE:6158) does have debt on its balance sheet. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Waida Mfg.Ltd's Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Waida Mfg.Ltd had debt of JP¥551.0m, up from JP¥461.0m in one year. However, its balance sheet shows it holds JP¥4.20b in cash, so it actually has JP¥3.65b net cash.

How Strong Is Waida Mfg.Ltd's Balance Sheet?

The latest balance sheet data shows that Waida Mfg.Ltd had liabilities of JP¥1.15b due within a year, and liabilities of JP¥710.0m falling due after that. On the other hand, it had cash of JP¥4.20b and JP¥1.89b worth of receivables due within a year. So it actually has JP¥4.23b more liquid assets than total liabilities.

This excess liquidity is a great indication that Waida Mfg.Ltd's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Waida Mfg.Ltd has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for Waida Mfg.Ltd

On the other hand, Waida Mfg.Ltd's EBIT dived 15%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. But it is Waida Mfg.Ltd'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 company can only pay off debt with cold hard cash, not accounting profits. Waida Mfg.Ltd 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. Considering the last three years, Waida Mfg.Ltd actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to investigate a company's debt, in this case Waida Mfg.Ltd has JP¥3.65b in net cash and a decent-looking balance sheet. So we don't have any problem with Waida Mfg.Ltd's use of debt. 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 Waida Mfg.Ltd is showing 3 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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.