These 4 Measures Indicate That Ishii Iron Works (TSE:6362) Is Using Debt Reasonably Well

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Ishii Iron Works Co., Ltd. (TSE:6362) 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 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Ishii Iron Works

What Is Ishii Iron Works's Debt?

The image below, which you can click on for greater detail, shows that Ishii Iron Works had debt of JP¥1.17b at the end of March 2024, a reduction from JP¥1.41b over a year. However, it does have JP¥2.36b in cash offsetting this, leading to net cash of JP¥1.19b.

How Healthy Is Ishii Iron Works' Balance Sheet?

According to the last reported balance sheet, Ishii Iron Works had liabilities of JP¥3.55b due within 12 months, and liabilities of JP¥4.71b due beyond 12 months. Offsetting these obligations, it had cash of JP¥2.36b as well as receivables valued at JP¥1.90b due within 12 months. So it has liabilities totalling JP¥4.00b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Ishii Iron Works is worth JP¥12.0b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Ishii Iron Works boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Ishii Iron Works has boosted its EBIT by 39%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Ishii Iron Works 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Ishii Iron Works 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. In the last three years, Ishii Iron Works's free cash flow amounted to 47% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While Ishii Iron Works does have more liabilities than liquid assets, it also has net cash of JP¥1.19b. And it impressed us with its EBIT growth of 39% over the last year. So we are not troubled with Ishii Iron Works's debt use. 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. Case in point: We've spotted 1 warning sign for Ishii Iron Works you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.