David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 note that Peers Co.,Ltd. (TSE:7066) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
Check out our latest analysis for PeersLtd
How Much Debt Does PeersLtd Carry?
As you can see below, PeersLtd had JP¥1.40b of debt at December 2023, down from JP¥1.63b a year prior. However, its balance sheet shows it holds JP¥2.61b in cash, so it actually has JP¥1.21b net cash.
How Healthy Is PeersLtd's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that PeersLtd had liabilities of JP¥1.36b due within 12 months and liabilities of JP¥872.0m due beyond that. Offsetting this, it had JP¥2.61b in cash and JP¥705.0m in receivables that were due within 12 months. So it actually has JP¥1.09b more liquid assets than total liabilities.
This surplus suggests that PeersLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, PeersLtd boasts net cash, so it's fair to say it does not have a heavy debt load!
Better yet, PeersLtd grew its EBIT by 129% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is PeersLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. PeersLtd 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 two years, PeersLtd generated free cash flow amounting to a very robust 91% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that PeersLtd has net cash of JP¥1.21b, as well as more liquid assets than liabilities. The cherry on top was that in converted 91% of that EBIT to free cash flow, bringing in JP¥620m. So is PeersLtd'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 example PeersLtd has 4 warning signs (and 1 which is a bit concerning) we think you should know about.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.
About TSE:7066
Excellent balance sheet and fair value.
