internet infinity (TSE:6545) Has A Rock Solid Balance Sheet

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. We can see that internet infinity Inc. (TSE:6545) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 internet infinity

What Is internet infinity's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 internet infinity had JP¥947.0m of debt, an increase on JP¥867.0m, over one year. But on the other hand it also has JP¥1.29b in cash, leading to a JP¥341.0m net cash position.

How Healthy Is internet infinity's Balance Sheet?

We can see from the most recent balance sheet that internet infinity had liabilities of JP¥1.50b falling due within a year, and liabilities of JP¥255.0m due beyond that. Offsetting these obligations, it had cash of JP¥1.29b as well as receivables valued at JP¥883.0m due within 12 months. So it actually has JP¥413.0m more liquid assets than total liabilities.

This surplus suggests that internet infinity has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that internet infinity 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 internet infinity has boosted its EBIT by 57%, 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 internet infinity's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. internet infinity 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, internet infinity actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that internet infinity has net cash of JP¥341.0m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥162m, being 103% of its EBIT. The bottom line is that we do not find internet infinity'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. Case in point: We've spotted 2 warning signs for internet infinity you should be aware of.

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.