With us (TYO:9696) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that With us Corporation (TYO:9696) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for With us

What Is With us's Debt?

As you can see below, at the end of September 2020, With us had JP¥1.46b of debt, up from JP¥1.04b a year ago. Click the image for more detail. But on the other hand it also has JP¥4.53b in cash, leading to a JP¥3.07b net cash position.

How Healthy Is With us's Balance Sheet?

According to the last reported balance sheet, With us had liabilities of JP¥5.77b due within 12 months, and liabilities of JP¥2.16b due beyond 12 months. Offsetting these obligations, it had cash of JP¥4.53b as well as receivables valued at JP¥287.0m due within 12 months. So its liabilities total JP¥3.11b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of JP¥3.94b, so it does suggest shareholders should keep an eye on With us's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, With us also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that With us's load is not too heavy, because its EBIT was down 33% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since With us 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. With us may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, With us recorded free cash flow worth a fulsome 91% 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 With us does have more liabilities than liquid assets, it also has net cash of JP¥3.07b. The cherry on top was that in converted 91% of that EBIT to free cash flow, bringing in JP¥673m. So we don't have any problem with With us's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for With us that you should be aware of.

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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