Does Management SolutionsLtd (TSE:7033) Have A Healthy Balance Sheet?

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 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 can see that Management Solutions co.,Ltd. (TSE:7033) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Management SolutionsLtd

How Much Debt Does Management SolutionsLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Management SolutionsLtd had JP¥1.44b of debt in January 2024, down from JP¥1.94b, one year before. But it also has JP¥2.70b in cash to offset that, meaning it has JP¥1.26b net cash.

A Look At Management SolutionsLtd's Liabilities

We can see from the most recent balance sheet that Management SolutionsLtd had liabilities of JP¥2.18b falling due within a year, and liabilities of JP¥661.0m due beyond that. Offsetting this, it had JP¥2.70b in cash and JP¥2.23b in receivables that were due within 12 months. So it can boast JP¥2.09b more liquid assets than total liabilities.

This short term liquidity is a sign that Management SolutionsLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Management SolutionsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Management SolutionsLtd grew its EBIT by 199% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Management SolutionsLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Management SolutionsLtd 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. Over the most recent three years, Management SolutionsLtd recorded free cash flow worth 66% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 Management SolutionsLtd has net cash of JP¥1.26b, as well as more liquid assets than liabilities. And we liked the look of last year's 199% year-on-year EBIT growth. So is Management SolutionsLtd's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Management SolutionsLtd that 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.