ASICS (TSE:7936) Seems To Use Debt Rather Sparingly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 ASICS Corporation (TSE:7936) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for ASICS

What Is ASICS's Net Debt?

As you can see below, ASICS had JP¥62.5b of debt at December 2024, down from JP¥82.6b a year prior. However, its balance sheet shows it holds JP¥127.0b in cash, so it actually has JP¥64.5b net cash.

A Look At ASICS' Liabilities

The latest balance sheet data shows that ASICS had liabilities of JP¥194.7b due within a year, and liabilities of JP¥89.3b falling due after that. Offsetting these obligations, it had cash of JP¥127.0b as well as receivables valued at JP¥71.2b due within 12 months. So it has liabilities totalling JP¥85.9b more than its cash and near-term receivables, combined.

Since publicly traded ASICS shares are worth a very impressive total of JP¥2.28t, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, ASICS boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that ASICS has boosted its EBIT by 85%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if ASICS 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While ASICS 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, ASICS produced sturdy free cash flow equating to 65% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about ASICS's liabilities, but we can be reassured by the fact it has has net cash of JP¥64.5b. And we liked the look of last year's 85% year-on-year EBIT growth. So we don't think ASICS'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 1 warning sign for ASICS that you should be aware of.

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.