Is JM HoldingsLtd (TSE:3539) Using Too Much Debt?

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 can see that JM Holdings Co.,Ltd. (TSE:3539) does use debt in its business. But the more important question is: how much risk is that debt creating?

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What Risk Does Debt Bring?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is JM HoldingsLtd's Debt?

As you can see below, JM HoldingsLtd had JP¥8.02b of debt, at January 2025, which is about the same as the year before. You can click the chart for greater detail. But it also has JP¥16.4b in cash to offset that, meaning it has JP¥8.38b net cash.

How Strong Is JM HoldingsLtd's Balance Sheet?

The latest balance sheet data shows that JM HoldingsLtd had liabilities of JP¥19.7b due within a year, and liabilities of JP¥7.06b falling due after that. Offsetting these obligations, it had cash of JP¥16.4b as well as receivables valued at JP¥4.01b due within 12 months. So its liabilities total JP¥6.33b more than the combination of its cash and short-term receivables.

Given JM HoldingsLtd has a market capitalization of JP¥61.7b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, JM HoldingsLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

See our latest analysis for JM HoldingsLtd

Fortunately, JM HoldingsLtd grew its EBIT by 5.0% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But it is JM HoldingsLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While JM HoldingsLtd 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. Looking at the most recent three years, JM HoldingsLtd recorded free cash flow of 40% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While JM HoldingsLtd does have more liabilities than liquid assets, it also has net cash of JP¥8.38b. On top of that, it increased its EBIT by 5.0% in the last twelve months. So we are not troubled with JM HoldingsLtd's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in JM HoldingsLtd, you may well want to click here to check an interactive graph of its earnings per share history.

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.