Unozawa-gumi Iron Works (TSE:6396) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Unozawa-gumi Iron Works, Limited (TSE:6396) makes use of debt. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Unozawa-gumi Iron Works's Debt?

As you can see below, Unozawa-gumi Iron Works had JP¥2.17b of debt, at December 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have JP¥2.53b in cash offsetting this, leading to net cash of JP¥355.0m.

A Look At Unozawa-gumi Iron Works' Liabilities

We can see from the most recent balance sheet that Unozawa-gumi Iron Works had liabilities of JP¥2.20b falling due within a year, and liabilities of JP¥2.81b due beyond that. Offsetting this, it had JP¥2.53b in cash and JP¥1.61b in receivables that were due within 12 months. So it has liabilities totalling JP¥866.0m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Unozawa-gumi Iron Works is worth JP¥3.16b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Unozawa-gumi Iron Works boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Unozawa-gumi Iron Works

Also good is that Unozawa-gumi Iron Works grew its EBIT at 12% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But it is Unozawa-gumi Iron Works'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. Unozawa-gumi Iron Works 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. In the last three years, Unozawa-gumi Iron Works's free cash flow amounted to 47% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although Unozawa-gumi Iron Works's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of JP¥355.0m. And it also grew its EBIT by 12% over the last year. So we are not troubled with Unozawa-gumi Iron Works's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Unozawa-gumi Iron Works that you should be aware of before investing here.

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.