BayCurrent Consulting (TSE:6532) Has A Rock Solid 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that BayCurrent Consulting, Inc. (TSE:6532) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for BayCurrent Consulting

What Is BayCurrent Consulting's Net Debt?

You can click the graphic below for the historical numbers, but it shows that BayCurrent Consulting had JP¥1.84b of debt in August 2024, down from JP¥2.89b, one year before. But on the other hand it also has JP¥52.4b in cash, leading to a JP¥50.5b net cash position.

A Look At BayCurrent Consulting's Liabilities

According to the last reported balance sheet, BayCurrent Consulting had liabilities of JP¥15.3b due within 12 months, and liabilities of JP¥1.87b due beyond 12 months. Offsetting this, it had JP¥52.4b in cash and JP¥16.0b in receivables that were due within 12 months. So it can boast JP¥51.2b more liquid assets than total liabilities.

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

Also good is that BayCurrent Consulting grew its EBIT at 14% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if BayCurrent Consulting 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. BayCurrent Consulting 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 most recent three years, BayCurrent Consulting recorded free cash flow worth 70% 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.

Summing Up

While it is always sensible to investigate a company's debt, in this case BayCurrent Consulting has JP¥50.5b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥24b, being 70% of its EBIT. So is BayCurrent Consulting's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in BayCurrent Consulting, you may well want to click here to check an interactive graph of its earnings per share history.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.