Management SolutionsLtd (TSE:7033) Has A Pretty Healthy 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.' 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. As with many other companies Management Solutions co.,Ltd. (TSE:7033) makes use of debt. But is this debt a concern to shareholders?

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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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Management SolutionsLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that Management SolutionsLtd had JP¥499.0m of debt in December 2024, down from JP¥1.44b, one year before. However, its balance sheet shows it holds JP¥2.81b in cash, so it actually has JP¥2.31b net cash.

How Strong Is Management SolutionsLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Management SolutionsLtd had liabilities of JP¥2.08b due within 12 months and liabilities of JP¥130.0m due beyond that. Offsetting this, it had JP¥2.81b in cash and JP¥2.98b in receivables that were due within 12 months. So it actually has JP¥3.59b 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. Simply put, the fact that Management SolutionsLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Management SolutionsLtd

Fortunately, Management SolutionsLtd grew its EBIT by 6.3% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Management SolutionsLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Management SolutionsLtd 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. In the last three years, Management SolutionsLtd's free cash flow amounted to 50% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Management SolutionsLtd has net cash of JP¥2.31b, as well as more liquid assets than liabilities. And it also grew its EBIT by 6.3% over the last year. So we don't think Management SolutionsLtd'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 example, we've discovered 2 warning signs for Management SolutionsLtd (1 can't be ignored!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.