David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 AuBEX CORPORATION (TSE:3583) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for AuBEX
What Is AuBEX's Net Debt?
The image below, which you can click on for greater detail, shows that AuBEX had debt of JPĀ„1.79b at the end of March 2024, a reduction from JPĀ„2.16b over a year. However, it does have JPĀ„2.95b in cash offsetting this, leading to net cash of JPĀ„1.17b.
How Strong Is AuBEX's Balance Sheet?
We can see from the most recent balance sheet that AuBEX had liabilities of JPĀ„1.75b falling due within a year, and liabilities of JPĀ„1.72b due beyond that. Offsetting this, it had JPĀ„2.95b in cash and JPĀ„1.30b in receivables that were due within 12 months. So it can boast JPĀ„784.0m more liquid assets than total liabilities.
This surplus suggests that AuBEX is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that AuBEX has more cash than debt is arguably a good indication that it can manage its debt safely.
But the other side of the story is that AuBEX saw its EBIT decline by 10.0% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is AuBEX's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. AuBEX 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. Over the last three years, AuBEX recorded free cash flow worth a fulsome 95% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that AuBEX has net cash of JPĀ„1.17b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JPĀ„903m, being 95% of its EBIT. So we don't think AuBEX's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for AuBEX that you should be aware of.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
About TSE:3583
AuBEX
Manufactures and sells nibs and medical equipment in Japan and internationally.
Flawless balance sheet, good value and pays a dividend.
