We Think Daiseki Eco. Solution (TSE:1712) Can Stay On Top Of Its Debt

Warren Buffett famously said, '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 can see that Daiseki Eco. Solution Co., Ltd. (TSE:1712) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

Check out our latest analysis for Daiseki Eco. Solution

How Much Debt Does Daiseki Eco. Solution Carry?

You can click the graphic below for the historical numbers, but it shows that as of May 2024 Daiseki Eco. Solution had JP¥7.56b of debt, an increase on JP¥6.58b, over one year. However, it does have JP¥3.14b in cash offsetting this, leading to net debt of about JP¥4.42b.

How Strong Is Daiseki Eco. Solution's Balance Sheet?

The latest balance sheet data shows that Daiseki Eco. Solution had liabilities of JP¥5.07b due within a year, and liabilities of JP¥5.52b falling due after that. On the other hand, it had cash of JP¥3.14b and JP¥2.97b worth of receivables due within a year. So it has liabilities totalling JP¥4.48b more than its cash and near-term receivables, combined.

Daiseki Eco. Solution has a market capitalization of JP¥18.5b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Daiseki Eco. Solution has a low net debt to EBITDA ratio of only 1.2. And its EBIT easily covers its interest expense, being 410 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. And we also note warmly that Daiseki Eco. Solution grew its EBIT by 18% 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 Daiseki Eco. Solution 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the most recent three years, Daiseki Eco. Solution recorded free cash flow worth 66% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Our View

The good news is that Daiseki Eco. Solution's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And that's just the beginning of the good news since its EBIT growth rate is also very heartening. Zooming out, Daiseki Eco. Solution seems to use debt quite reasonably; and that gets the nod from us. While debt does bring risk, when used wisely it can also bring a higher return on equity. Over time, share prices tend to follow earnings per share, so if you're interested in Daiseki Eco. Solution, you may well want to click here to check an interactive graph of its earnings per share history.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.