These 4 Measures Indicate That ALBISLtd (TSE:7475) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies ALBIS Co.,Ltd. (TSE:7475) makes use of debt. But the more important question is: how much risk is that debt creating?

We've discovered 1 warning sign about ALBISLtd. View them for free.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is ALBISLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2024 ALBISLtd had debt of JP¥4.11b, up from JP¥2.90b in one year. However, it does have JP¥4.30b in cash offsetting this, leading to net cash of JP¥185.0m.

How Strong Is ALBISLtd's Balance Sheet?

We can see from the most recent balance sheet that ALBISLtd had liabilities of JP¥13.8b falling due within a year, and liabilities of JP¥5.45b due beyond that. On the other hand, it had cash of JP¥4.30b and JP¥3.49b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥11.4b.

ALBISLtd has a market capitalization of JP¥24.7b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, ALBISLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for ALBISLtd

But the other side of the story is that ALBISLtd saw its EBIT decline by 5.3% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since ALBISLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While ALBISLtd 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 last three years, ALBISLtd recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While ALBISLtd does have more liabilities than liquid assets, it also has net cash of JP¥185.0m. And it impressed us with free cash flow of -JP¥267m, being 82% of its EBIT. So we don't have any problem with ALBISLtd's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with ALBISLtd , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.