Does Aidma Holdings (TSE:7373) Have A 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.' 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 note that Aidma Holdings, Inc. (TSE:7373) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Aidma Holdings

What Is Aidma Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Aidma Holdings had debt of JP¥491.0m at the end of November 2024, a reduction from JP¥645.0m over a year. However, it does have JP¥5.60b in cash offsetting this, leading to net cash of JP¥5.11b.

How Strong Is Aidma Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Aidma Holdings had liabilities of JP¥3.14b due within 12 months and liabilities of JP¥125.0m due beyond that. Offsetting these obligations, it had cash of JP¥5.60b as well as receivables valued at JP¥1.17b due within 12 months. So it actually has JP¥3.50b more liquid assets than total liabilities.

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

Another good sign is that Aidma Holdings has been able to increase its EBIT by 25% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Aidma Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Aidma Holdings 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, Aidma Holdings produced sturdy free cash flow equating to 72% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Aidma Holdings has net cash of JP¥5.11b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 25% over the last year. So is Aidma Holdings's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Aidma Holdings , and understanding them should be part of your investment process.

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.