MODEC (TSE:6269) Has A Pretty Healthy Balance Sheet

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.' 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. Importantly, MODEC, Inc. (TSE:6269) does carry debt. But is this debt a concern to shareholders?

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. 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.

See our latest analysis for MODEC

What Is MODEC's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 MODEC had JP¥80.9b of debt, an increase on JP¥52.0b, over one year. But it also has JP¥152.0b in cash to offset that, meaning it has JP¥71.1b net cash.

How Healthy Is MODEC's Balance Sheet?

We can see from the most recent balance sheet that MODEC had liabilities of JP¥318.3b falling due within a year, and liabilities of JP¥86.3b due beyond that. Offsetting this, it had JP¥152.0b in cash and JP¥87.9b in receivables that were due within 12 months. So it has liabilities totalling JP¥164.7b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of JP¥211.1b. 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, MODEC also has more cash than debt, so we're pretty confident it can manage its debt safely.

Although MODEC made a loss at the EBIT level, last year, it was also good to see that it generated JP¥9.1b in EBIT over the last twelve months. 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 MODEC 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. MODEC 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, MODEC actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although MODEC's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of JP¥71.1b. And it impressed us with free cash flow of JP¥68b, being 744% of its EBIT. So we don't have any problem with MODEC's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example MODEC has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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.