These 4 Measures Indicate That Ebara JitsugyoLtd (TSE:6328) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Ebara Jitsugyo Co.,Ltd. (TSE:6328) makes use of debt. But the real question is whether this debt is making the company risky.

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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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 Ebara JitsugyoLtd's Net Debt?

As you can see below, Ebara JitsugyoLtd had JP¥1.01b of debt at December 2024, down from JP¥1.09b a year prior. But on the other hand it also has JP¥14.9b in cash, leading to a JP¥13.9b net cash position.

How Healthy Is Ebara JitsugyoLtd's Balance Sheet?

According to the last reported balance sheet, Ebara JitsugyoLtd had liabilities of JP¥17.5b due within 12 months, and liabilities of JP¥2.03b due beyond 12 months. Offsetting this, it had JP¥14.9b in cash and JP¥13.9b in receivables that were due within 12 months. So it actually has JP¥9.18b more liquid assets than total liabilities.

This excess liquidity suggests that Ebara JitsugyoLtd is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Ebara JitsugyoLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Ebara JitsugyoLtd

Fortunately, Ebara JitsugyoLtd grew its EBIT by 5.6% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Ebara JitsugyoLtd 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Ebara JitsugyoLtd 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. Over the most recent three years, Ebara JitsugyoLtd recorded free cash flow worth 70% 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 we empathize with investors who find debt concerning, you should keep in mind that Ebara JitsugyoLtd has net cash of JP¥13.9b, as well as more liquid assets than liabilities. The cherry on top was that in converted 70% of that EBIT to free cash flow, bringing in JP¥1.8b. So we don't think Ebara JitsugyoLtd'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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Ebara JitsugyoLtd 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.