These 4 Measures Indicate That MedPeerInc (TSE:6095) Is Using Debt Safely

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 MedPeer,Inc. (TSE:6095) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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, 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for MedPeerInc

What Is MedPeerInc's Net Debt?

As you can see below, MedPeerInc had JP¥3.39b of debt at June 2024, down from JP¥3.94b a year prior. But it also has JP¥5.45b in cash to offset that, meaning it has JP¥2.06b net cash.

How Strong Is MedPeerInc's Balance Sheet?

According to the last reported balance sheet, MedPeerInc had liabilities of JP¥2.32b due within 12 months, and liabilities of JP¥3.71b due beyond 12 months. On the other hand, it had cash of JP¥5.45b and JP¥3.10b worth of receivables due within a year. So it actually has JP¥2.52b more liquid assets than total liabilities.

This surplus suggests that MedPeerInc is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that MedPeerInc has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that MedPeerInc has boosted its EBIT by 35%, thus reducing the spectre of future debt repayments. 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 MedPeerInc'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While MedPeerInc 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. During the last three years, MedPeerInc produced sturdy free cash flow equating to 67% of its EBIT, about what we'd expect. 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 MedPeerInc has net cash of JP¥2.06b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 35% over the last year. The bottom line is that we do not find MedPeerInc's debt levels at all concerning. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that MedPeerInc is showing 3 warning signs in our investment analysis , you should know about...

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.