We Think Ifuji Sangyo (TSE:2924) Can Manage Its Debt With Ease

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Ifuji Sangyo Co., Ltd. (TSE:2924) makes use of debt. But should shareholders be worried about its use of debt?

We check all companies for important risks. See what we found for Ifuji Sangyo in our free report.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Ifuji Sangyo's Debt?

The image below, which you can click on for greater detail, shows that Ifuji Sangyo had debt of JP¥2.55b at the end of December 2024, a reduction from JP¥3.12b over a year. But on the other hand it also has JP¥4.41b in cash, leading to a JP¥1.86b net cash position.

How Strong Is Ifuji Sangyo's Balance Sheet?

The latest balance sheet data shows that Ifuji Sangyo had liabilities of JP¥5.31b due within a year, and liabilities of JP¥1.07b falling due after that. On the other hand, it had cash of JP¥4.41b and JP¥4.43b worth of receivables due within a year. So it can boast JP¥2.46b more liquid assets than total liabilities.

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

Check out our latest analysis for Ifuji Sangyo

Another good sign is that Ifuji Sangyo has been able to increase its EBIT by 20% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Ifuji Sangyo'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, a company can only pay off debt with cold hard cash, not accounting profits. While Ifuji Sangyo 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. In the last three years, Ifuji Sangyo's free cash flow amounted to 38% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Ifuji Sangyo has JP¥1.86b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 20% over the last year. So we don't think Ifuji Sangyo's use of debt is risky. 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 Ifuji Sangyo'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. 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.