Is Max (TSE:6454) Using Too Much Debt?

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. We note that Max Co., Ltd. (TSE:6454) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

We check all companies for important risks. See what we found for Max in our free report.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Max's Debt?

You can click the graphic below for the historical numbers, but it shows that Max had JP¥975.0m of debt in December 2024, down from JP¥1.88b, one year before. However, it does have JP¥43.2b in cash offsetting this, leading to net cash of JP¥42.2b.

How Strong Is Max's Balance Sheet?

We can see from the most recent balance sheet that Max had liabilities of JP¥15.3b falling due within a year, and liabilities of JP¥6.39b due beyond that. Offsetting this, it had JP¥43.2b in cash and JP¥16.2b in receivables that were due within 12 months. So it can boast JP¥37.8b more liquid assets than total liabilities.

This excess liquidity suggests that Max 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, Max boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Max

And we also note warmly that Max grew its EBIT by 16% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Max can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Max 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, Max recorded free cash flow worth 65% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Max has JP¥42.2b in net cash and a decent-looking balance sheet. So we don't think Max's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Max's earnings per share history for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.