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.' 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. Importantly, JEOL Ltd. (TSE:6951) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. 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. 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 JEOL
What Is JEOL's Debt?
The image below, which you can click on for greater detail, shows that at March 2024 JEOL had debt of JPĀ„14.5b, up from JPĀ„11.5b in one year. However, its balance sheet shows it holds JPĀ„31.5b in cash, so it actually has JPĀ„17.0b net cash.
How Healthy Is JEOL's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that JEOL had liabilities of JPĀ„88.1b due within 12 months and liabilities of JPĀ„16.6b due beyond that. On the other hand, it had cash of JPĀ„31.5b and JPĀ„58.5b worth of receivables due within a year. So its liabilities total JPĀ„14.7b more than the combination of its cash and short-term receivables.
Given JEOL has a market capitalization of JPĀ„348.1b, it's hard to believe these liabilities pose much 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, JEOL also has more cash than debt, so we're pretty confident it can manage its debt safely.
Also good is that JEOL grew its EBIT at 14% over the last year, further increasing its ability to manage debt. 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 JEOL can strengthen its balance sheet over time. 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 JEOL 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. In the last three years, JEOL's free cash flow amounted to 45% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Summing Up
We could understand if investors are concerned about JEOL's liabilities, but we can be reassured by the fact it has has net cash of JPĀ„17.0b. And it also grew its EBIT by 14% over the last year. So is JEOL's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 1 warning sign for JEOL 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.
New: Manage All Your Stock Portfolios in One Place
We've created the ultimate portfolio companion for stock investors, and it's free.
ā¢ Connect an unlimited number of Portfolios and see your total in one currency
ā¢ Be alerted to new Warning Signs or Risks via email or mobile
ā¢ Track the Fair Value of your stocks
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
About TSE:6951
JEOL
Engages in the research, development, manufacture, and marketing of scientific and metrology instruments, semiconductor and industrial equipment, and medical equipment worldwide.
Flawless balance sheet with solid track record and pays a dividend.
