Does Interlife Holdings (TSE:1418) Have A Healthy Balance Sheet?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Interlife Holdings Co., Ltd. (TSE:1418) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Interlife Holdings

What Is Interlife Holdings's Debt?

The image below, which you can click on for greater detail, shows that Interlife Holdings had debt of JP¥1.66b at the end of November 2024, a reduction from JP¥1.92b over a year. However, it does have JP¥2.09b in cash offsetting this, leading to net cash of JP¥425.2m.

A Look At Interlife Holdings' Liabilities

We can see from the most recent balance sheet that Interlife Holdings had liabilities of JP¥4.30b falling due within a year, and liabilities of JP¥1.24b due beyond that. Offsetting this, it had JP¥2.09b in cash and JP¥4.25b in receivables that were due within 12 months. So it actually has JP¥799.0m more liquid assets than total liabilities.

This surplus suggests that Interlife Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Interlife Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Interlife Holdings grew its EBIT by 240% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Interlife Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Interlife Holdings 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. Considering the last three years, Interlife Holdings actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case Interlife Holdings has JP¥425.2m in net cash and a decent-looking balance sheet. And we liked the look of last year's 240% year-on-year EBIT growth. So we don't think Interlife Holdings's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Interlife Holdings is showing 2 warning signs in our investment analysis , you should know about...

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.