RhythmLtd (TSE:7769) Has A Rock Solid Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Rhythm Co.,Ltd. (TSE:7769) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for RhythmLtd

What Is RhythmLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 RhythmLtd had debt of JP¥8.43b, up from JP¥6.21b in one year. However, its balance sheet shows it holds JP¥13.9b in cash, so it actually has JP¥5.48b net cash.

How Strong Is RhythmLtd's Balance Sheet?

The latest balance sheet data shows that RhythmLtd had liabilities of JP¥6.78b due within a year, and liabilities of JP¥8.04b falling due after that. On the other hand, it had cash of JP¥13.9b and JP¥6.04b worth of receivables due within a year. So it can boast JP¥5.14b more liquid assets than total liabilities.

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

In addition to that, we're happy to report that RhythmLtd has boosted its EBIT by 47%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since RhythmLtd will need earnings to service that debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While RhythmLtd 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. During the last three years, RhythmLtd produced sturdy free cash flow equating to 80% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case RhythmLtd has JP¥5.48b in net cash and a decent-looking balance sheet. And we liked the look of last year's 47% year-on-year EBIT growth. So is RhythmLtd's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in RhythmLtd, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.