JMDC (TSE:4483) Seems To Use Debt Rather Sparingly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 JMDC Inc. (TSE:4483) does use debt in its business. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 JMDC

How Much Debt Does JMDC Carry?

The image below, which you can click on for greater detail, shows that at December 2023 JMDC had debt of JP¥13.4b, up from JP¥12.2b in one year. But on the other hand it also has JP¥20.6b in cash, leading to a JP¥7.21b net cash position.

How Healthy Is JMDC's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that JMDC had liabilities of JP¥13.4b due within 12 months and liabilities of JP¥20.2b due beyond that. Offsetting these obligations, it had cash of JP¥20.6b as well as receivables valued at JP¥13.0b due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to JMDC's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the JP¥254.1b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, JMDC boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that JMDC has boosted its EBIT by 37%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if JMDC 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. JMDC 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. In the last three years, JMDC's free cash flow amounted to 35% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that JMDC has net cash of JP¥7.21b, as well as more liquid assets than liabilities. And we liked the look of last year's 37% year-on-year EBIT growth. So we don't think JMDC's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for JMDC 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.