These 4 Measures Indicate That StemCell Institute (TSE:7096) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies StemCell Institute Inc. (TSE:7096) makes use of debt. But the real question is whether this debt is making the company risky.

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When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does StemCell Institute Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 StemCell Institute had JP¥399.0m of debt, an increase on none, over one year. However, its balance sheet shows it holds JP¥3.53b in cash, so it actually has JP¥3.13b net cash.

A Look At StemCell Institute's Liabilities

Zooming in on the latest balance sheet data, we can see that StemCell Institute had liabilities of JP¥4.04b due within 12 months and liabilities of JP¥461.0m due beyond that. On the other hand, it had cash of JP¥3.53b and JP¥1.81b worth of receivables due within a year. So it actually has JP¥835.0m more liquid assets than total liabilities.

This surplus suggests that StemCell Institute has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that StemCell Institute has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for StemCell Institute

Fortunately, StemCell Institute grew its EBIT by 6.4% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if StemCell Institute 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. StemCell Institute 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, StemCell Institute's free cash flow amounted to 46% of its EBIT, less 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 StemCell Institute has JP¥3.13b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 6.4% over the last year. So we don't think StemCell Institute'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. For example, we've discovered 3 warning signs for StemCell Institute that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.