These 4 Measures Indicate That BayCurrent Consulting (TSE:6532) Is Using Debt Safely

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, BayCurrent Consulting, Inc. (TSE:6532) does carry debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for BayCurrent Consulting

What Is BayCurrent Consulting's Debt?

You can click the graphic below for the historical numbers, but it shows that BayCurrent Consulting had JP¥2.63b of debt in November 2023, down from JP¥3.68b, one year before. But it also has JP¥43.5b in cash to offset that, meaning it has JP¥40.8b net cash.

How Healthy Is BayCurrent Consulting's Balance Sheet?

The latest balance sheet data shows that BayCurrent Consulting had liabilities of JP¥12.6b due within a year, and liabilities of JP¥1.64b falling due after that. Offsetting these obligations, it had cash of JP¥43.5b as well as receivables valued at JP¥12.6b due within 12 months. So it can boast JP¥41.8b 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 positive, BayCurrent Consulting grew its EBIT by 23% in the last year, and that should make it easier to pay down debt, going forward. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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. During the last three years, BayCurrent Consulting produced sturdy free cash flow equating to 72% 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 we empathize with investors who find debt concerning, you should keep in mind that BayCurrent Consulting has net cash of JP¥40.8b, as well as more liquid assets than liabilities. And we liked the look of last year's 23% year-on-year EBIT growth. So is BayCurrent Consulting'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. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with BayCurrent Consulting .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.