B-R 31 Ice CreamLtd (TYO:2268) Seems To Use Debt Rather Sparingly

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.' 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. As with many other companies B-R 31 Ice Cream Co.,Ltd. (TYO:2268) makes use of debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for B-R 31 Ice CreamLtd

What Is B-R 31 Ice CreamLtd's Net Debt?

The image below, which you can click on for greater detail, shows that B-R 31 Ice CreamLtd had debt of JP¥1.43b at the end of December 2020, a reduction from JP¥1.66b over a year. But on the other hand it also has JP¥2.63b in cash, leading to a JP¥1.19b net cash position.

How Strong Is B-R 31 Ice CreamLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that B-R 31 Ice CreamLtd had liabilities of JP¥4.87b due within 12 months and liabilities of JP¥2.78b due beyond that. Offsetting this, it had JP¥2.63b in cash and JP¥2.32b in receivables that were due within 12 months. So its liabilities total JP¥2.71b more than the combination of its cash and short-term receivables.

Of course, B-R 31 Ice CreamLtd has a market capitalization of JP¥38.1b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, B-R 31 Ice CreamLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that B-R 31 Ice CreamLtd grew its EBIT at 16% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is B-R 31 Ice CreamLtd's earnings that will influence how the balance sheet holds up in the future. 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 B-R 31 Ice CreamLtd 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, B-R 31 Ice CreamLtd actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

We could understand if investors are concerned about B-R 31 Ice CreamLtd's liabilities, but we can be reassured by the fact it has has net cash of JP¥1.19b. And it impressed us with free cash flow of JP¥2.4b, being 203% of its EBIT. So we don't think B-R 31 Ice CreamLtd's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of B-R 31 Ice CreamLtd's earnings per share history for free.

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. 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.
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