Alfresa Holdings (TSE:2784) Seems To Use Debt Rather Sparingly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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, Alfresa Holdings Corporation (TSE:2784) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Alfresa Holdings

What Is Alfresa Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Alfresa Holdings had JP¥30.0b of debt, an increase on none, over one year. But it also has JP¥213.8b in cash to offset that, meaning it has JP¥183.8b net cash.

A Look At Alfresa Holdings' Liabilities

The latest balance sheet data shows that Alfresa Holdings had liabilities of JP¥907.0b due within a year, and liabilities of JP¥60.8b falling due after that. Offsetting these obligations, it had cash of JP¥213.8b as well as receivables valued at JP¥733.0b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥21.1b.

Since publicly traded Alfresa Holdings shares are worth a total of JP¥423.8b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Alfresa Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Alfresa Holdings grew its EBIT by 28% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Alfresa Holdings'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. Alfresa Holdings 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 last three years, Alfresa Holdings recorded free cash flow worth a fulsome 80% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

We could understand if investors are concerned about Alfresa Holdings's liabilities, but we can be reassured by the fact it has has net cash of JP¥183.8b. And it impressed us with free cash flow of JP¥71b, being 80% of its EBIT. So is Alfresa Holdings's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Alfresa Holdings, you may well want to click here to check an interactive graph of its earnings per share history.

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.

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