M3 (TSE:2413) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that M3, Inc. (TSE:2413) does use debt in its business. But should shareholders be worried about its use of debt?

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does M3 Carry?

The image below, which you can click on for greater detail, shows that at March 2025 M3 had debt of JP¥24.4b, up from JP¥18.5b in one year. But on the other hand it also has JP¥134.9b in cash, leading to a JP¥110.5b net cash position.

How Healthy Is M3's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that M3 had liabilities of JP¥82.1b due within 12 months and liabilities of JP¥86.8b due beyond that. On the other hand, it had cash of JP¥134.9b and JP¥65.0b worth of receivables due within a year. So it can boast JP¥31.0b more liquid assets than total liabilities.

This surplus suggests that M3 has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that M3 has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for M3

On the other hand, M3 saw its EBIT drop by 5.4% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine M3's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. M3 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 most recent three years, M3 recorded free cash flow worth 72% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that M3 has net cash of JP¥110.5b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥43b, being 72% of its EBIT. So we don't think M3's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in M3, 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.