Is B-R 31 Ice CreamLtd (TYO:2268) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 B-R 31 Ice Cream Co.,Ltd. (TYO:2268) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for B-R 31 Ice CreamLtd

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

As you can see below, B-R 31 Ice CreamLtd had JP¥1.49b of debt at September 2020, down from JP¥1.77b a year prior. But on the other hand it also has JP¥2.83b in cash, leading to a JP¥1.34b net cash position.

A Look At B-R 31 Ice CreamLtd's Liabilities

According to the last reported balance sheet, B-R 31 Ice CreamLtd had liabilities of JP¥4.81b due within 12 months, and liabilities of JP¥2.84b due beyond 12 months. On the other hand, it had cash of JP¥2.83b and JP¥2.30b worth of receivables due within a year. So it has liabilities totalling JP¥2.51b more than its cash and near-term receivables, combined.

Given B-R 31 Ice CreamLtd has a market capitalization of JP¥38.0b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, B-R 31 Ice CreamLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that B-R 31 Ice CreamLtd grew its EBIT by 113% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. 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. Happily for any shareholders, B-R 31 Ice CreamLtd actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that B-R 31 Ice CreamLtd has JP¥1.34b in net cash. The cherry on top was that in converted 138% of that EBIT to free cash flow, bringing in JP¥1.2b. So is B-R 31 Ice CreamLtd's debt a risk? It doesn't seem so to us. 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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