Here's Why Phil CompanyInc (TSE:3267) Can Manage Its Debt Responsibly

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 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. Importantly, Phil Company,Inc. (TSE:3267) does carry debt. But the real question is whether this debt is making the company risky.

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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Phil CompanyInc

How Much Debt Does Phil CompanyInc Carry?

The image below, which you can click on for greater detail, shows that at February 2024 Phil CompanyInc had debt of JP¥1.91b, up from JP¥640.0m in one year. But it also has JP¥2.65b in cash to offset that, meaning it has JP¥735.0m net cash.

How Strong Is Phil CompanyInc's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Phil CompanyInc had liabilities of JP¥2.35b due within 12 months and liabilities of JP¥1.39b due beyond that. Offsetting these obligations, it had cash of JP¥2.65b as well as receivables valued at JP¥94.0m due within 12 months. So it has liabilities totalling JP¥993.0m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Phil CompanyInc has a market capitalization of JP¥3.44b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Phil CompanyInc boasts net cash, so it's fair to say it does not have a heavy debt load!

While Phil CompanyInc doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Phil CompanyInc 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Phil CompanyInc 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. In the last three years, Phil CompanyInc created free cash flow amounting to 7.0% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

Although Phil CompanyInc's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of JP¥735.0m. So we are not troubled with Phil CompanyInc's debt use. 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. Case in point: We've spotted 5 warning signs for Phil CompanyInc you should be aware of, and 1 of them is concerning.

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.