Does Maezawa Kasei Industries (TSE:7925) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Maezawa Kasei Industries Co., Ltd. (TSE:7925) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Maezawa Kasei Industries

What Is Maezawa Kasei Industries's Debt?

You can click the graphic below for the historical numbers, but it shows that Maezawa Kasei Industries had JP¥330.0m of debt in March 2024, down from JP¥390.0m, one year before. However, it does have JP¥15.5b in cash offsetting this, leading to net cash of JP¥15.1b.

A Look At Maezawa Kasei Industries' Liabilities

Zooming in on the latest balance sheet data, we can see that Maezawa Kasei Industries had liabilities of JP¥7.42b due within 12 months and liabilities of JP¥1.51b due beyond that. On the other hand, it had cash of JP¥15.5b and JP¥9.55b worth of receivables due within a year. So it actually has JP¥16.1b more liquid assets than total liabilities.

This luscious liquidity implies that Maezawa Kasei Industries' balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Maezawa Kasei Industries has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Maezawa Kasei Industries saw its EBIT drop by 9.0% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Maezawa Kasei Industries's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Maezawa Kasei Industries 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, Maezawa Kasei Industries recorded free cash flow worth 73% 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 Maezawa Kasei Industries has JP¥15.1b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥1.9b, being 73% of its EBIT. So is Maezawa Kasei Industries's debt a risk? It doesn't seem so to us. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Maezawa Kasei Industries's dividend history, without delay!

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com