These 4 Measures Indicate That Eiken Chemical (TSE:4549) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Eiken Chemical Co., Ltd. (TSE:4549) does carry debt. But the more important question is: how much risk is that debt creating?

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Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Eiken Chemical's Net Debt?

As you can see below, Eiken Chemical had JP¥3.00b of debt, at March 2025, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has JP¥9.87b in cash, leading to a JP¥6.87b net cash position.

How Healthy Is Eiken Chemical's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Eiken Chemical had liabilities of JP¥14.4b due within 12 months and liabilities of JP¥4.40b due beyond that. On the other hand, it had cash of JP¥9.87b and JP¥12.1b worth of receivables due within a year. So it actually has JP¥3.21b more liquid assets than total liabilities.

This short term liquidity is a sign that Eiken Chemical could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Eiken Chemical has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Eiken Chemical

On the other hand, Eiken Chemical's EBIT dived 11%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 Eiken Chemical 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. While Eiken Chemical 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. Looking at the most recent three years, Eiken Chemical recorded free cash flow of 48% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Eiken Chemical has JP¥6.87b in net cash and a decent-looking balance sheet. So we are not troubled with Eiken Chemical's debt use. 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 Eiken Chemical 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.