Is Econach HoldingsLtd (TSE:3521) 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Econach Holdings Co.,Ltd. (TSE:3521) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Econach HoldingsLtd

How Much Debt Does Econach HoldingsLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Econach HoldingsLtd had JP¥748.0m of debt in June 2024, down from JP¥905.0m, one year before. However, its balance sheet shows it holds JP¥1.18b in cash, so it actually has JP¥427.0m net cash.

How Strong Is Econach HoldingsLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Econach HoldingsLtd had liabilities of JP¥381.0m due within 12 months and liabilities of JP¥749.0m due beyond that. Offsetting this, it had JP¥1.18b in cash and JP¥78.0m in receivables that were due within 12 months. So it can boast JP¥123.0m more liquid assets than total liabilities.

This surplus suggests that Econach HoldingsLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Econach HoldingsLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Econach HoldingsLtd turned things around in the last 12 months, delivering and EBIT of JP¥246m. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Econach HoldingsLtd'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Econach HoldingsLtd 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. Happily for any shareholders, Econach HoldingsLtd actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Econach HoldingsLtd has net cash of JP¥427.0m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥365m, being 148% of its EBIT. So we don't think Econach HoldingsLtd's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Econach HoldingsLtd you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.