These 4 Measures Indicate That IBOKINLtd (TYO:5699) Is Using Debt Reasonably Well

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. We can see that IBOKIN Co.,Ltd. (TYO:5699) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for IBOKINLtd

What Is IBOKINLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 IBOKINLtd had debt of JP¥585.0m, up from JP¥542.0m in one year. However, it does have JP¥1.53b in cash offsetting this, leading to net cash of JP¥943.0m.

How Strong Is IBOKINLtd's Balance Sheet?

We can see from the most recent balance sheet that IBOKINLtd had liabilities of JP¥1.53b falling due within a year, and liabilities of JP¥649.0m due beyond that. Offsetting this, it had JP¥1.53b in cash and JP¥655.0m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to IBOKINLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the JP¥3.87b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that IBOKINLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that IBOKINLtd has increased its EBIT by 8.3% over twelve months, which should ease any concerns about debt repayment. 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 IBOKINLtd 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 company can only pay off debt with cold hard cash, not accounting profits. While IBOKINLtd 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. Over the last three years, IBOKINLtd reported free cash flow worth 15% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case IBOKINLtd has JP¥943.0m in net cash and a decent-looking balance sheet. And it also grew its EBIT by 8.3% over the last year. So we are not troubled with IBOKINLtd'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 instance, we've identified 2 warning signs for IBOKINLtd that you should be aware of.

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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