Does ASIRO (TSE:7378) 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.' 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 ASIRO Inc. (TSE:7378) does have debt on its balance sheet. But is this debt a concern to shareholders?

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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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does ASIRO Carry?

The image below, which you can click on for greater detail, shows that ASIRO had debt of JP¥466.0m at the end of January 2025, a reduction from JP¥638.0m over a year. However, it does have JP¥1.53b in cash offsetting this, leading to net cash of JP¥1.07b.

How Healthy Is ASIRO's Balance Sheet?

According to the last reported balance sheet, ASIRO had liabilities of JP¥1.20b due within 12 months, and liabilities of JP¥436.0m due beyond 12 months. On the other hand, it had cash of JP¥1.53b and JP¥857.0m worth of receivables due within a year. So it actually has JP¥750.0m more liquid assets than total liabilities.

This short term liquidity is a sign that ASIRO could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that ASIRO has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for ASIRO

It was also good to see that despite losing money on the EBIT line last year, ASIRO turned things around in the last 12 months, delivering and EBIT of JP¥1.0b. 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 ASIRO'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While ASIRO 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 year, ASIRO recorded free cash flow worth 75% 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 ASIRO has net cash of JP¥1.07b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥776m, being 75% of its EBIT. So we don't think ASIRO's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for ASIRO that you should be aware of.

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.