Does gremzInc (TSE:3150) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that gremz,Inc. (TSE:3150) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for gremzInc

What Is gremzInc's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 gremzInc had debt of JP¥3.76b, up from JP¥3.16b in one year. However, it does have JP¥10.5b in cash offsetting this, leading to net cash of JP¥6.71b.

How Strong Is gremzInc's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that gremzInc had liabilities of JP¥5.81b due within 12 months and liabilities of JP¥2.81b due beyond that. Offsetting these obligations, it had cash of JP¥10.5b as well as receivables valued at JP¥3.76b due within 12 months. So it actually has JP¥5.61b more liquid assets than total liabilities.

This short term liquidity is a sign that gremzInc could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that gremzInc has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, gremzInc grew its EBIT by 44% over the last twelve months, and that growth will make it easier to handle its debt. 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 gremzInc 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. gremzInc 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. In the last three years, gremzInc's free cash flow amounted to 34% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case gremzInc has JP¥6.71b in net cash and a decent-looking balance sheet. And we liked the look of last year's 44% year-on-year EBIT growth. So is gremzInc's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 1 warning sign for gremzInc you should be aware of.

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.