We Think ERI Holdings (TSE:6083) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 ERI Holdings Co., Ltd. (TSE:6083) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is ERI Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of February 2025 ERI Holdings had JP¥2.60b of debt, an increase on JP¥2.45b, over one year. However, it does have JP¥4.93b in cash offsetting this, leading to net cash of JP¥2.33b.

A Look At ERI Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that ERI Holdings had liabilities of JP¥3.72b due within 12 months and liabilities of JP¥2.31b due beyond that. Offsetting these obligations, it had cash of JP¥4.93b as well as receivables valued at JP¥2.30b due within 12 months. So it can boast JP¥1.20b more liquid assets than total liabilities.

This surplus suggests that ERI Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, ERI Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for ERI Holdings

It is just as well that ERI Holdings's load is not too heavy, because its EBIT was down 39% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is ERI Holdings'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. ERI Holdings 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. During the last three years, ERI Holdings produced sturdy free cash flow equating to 65% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case ERI Holdings has JP¥2.33b in net cash and a decent-looking balance sheet. So we don't have any problem with ERI Holdings's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for ERI Holdings you should be aware of.

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.