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. Importantly, Jp-Holdings,Inc. (TSE:2749) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Jp-HoldingsInc
What Is Jp-HoldingsInc's Net Debt?
As you can see below, Jp-HoldingsInc had JP¥11.5b of debt at June 2024, down from JP¥15.0b a year prior. But it also has JP¥20.5b in cash to offset that, meaning it has JP¥8.96b net cash.
How Strong Is Jp-HoldingsInc's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Jp-HoldingsInc had liabilities of JP¥9.17b due within 12 months and liabilities of JP¥9.47b due beyond that. Offsetting these obligations, it had cash of JP¥20.5b as well as receivables valued at JP¥2.69b due within 12 months. So it actually has JP¥4.51b more liquid assets than total liabilities.
This short term liquidity is a sign that Jp-HoldingsInc could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Jp-HoldingsInc has more cash than debt is arguably a good indication that it can manage its debt safely.
In addition to that, we're happy to report that Jp-HoldingsInc has boosted its EBIT by 34%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Jp-HoldingsInc can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Jp-HoldingsInc 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. During the last three years, Jp-HoldingsInc generated free cash flow amounting to a very robust 86% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Jp-HoldingsInc has net cash of JP¥8.96b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥5.3b, being 86% of its EBIT. So we don't think Jp-HoldingsInc's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Jp-HoldingsInc, you may well want to click here to check an interactive graph of its earnings per share history.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.
About TSE:2749
Flawless balance sheet with solid track record.
