Goldwin (TSE:8111) Has A Rock Solid Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Goldwin Inc. (TSE:8111) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Goldwin

What Is Goldwin's Net Debt?

As you can see below, Goldwin had JP¥823.0m of debt at September 2024, down from JP¥1.98b a year prior. However, its balance sheet shows it holds JP¥36.5b in cash, so it actually has JP¥35.6b net cash.

A Look At Goldwin's Liabilities

We can see from the most recent balance sheet that Goldwin had liabilities of JP¥34.3b falling due within a year, and liabilities of JP¥2.02b due beyond that. Offsetting this, it had JP¥36.5b in cash and JP¥19.9b in receivables that were due within 12 months. So it can boast JP¥20.0b more liquid assets than total liabilities.

This surplus suggests that Goldwin has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Goldwin boasts net cash, so it's fair to say it does not have a heavy debt load!

Goldwin's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Goldwin'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. While Goldwin 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, Goldwin generated free cash flow amounting to a very robust 86% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Goldwin has JP¥35.6b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥22b, being 86% of its EBIT. So we don't think Goldwin's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Goldwin that you should be aware of.

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.