We Think AS ONE (TSE:7476) Can Stay On Top Of Its Debt

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, AS ONE Corporation (TSE:7476) does carry debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

See our latest analysis for AS ONE

What Is AS ONE's Net Debt?

You can click the graphic below for the historical numbers, but it shows that AS ONE had JP¥3.60b of debt in March 2024, down from JP¥6.19b, one year before. However, it does have JP¥13.9b in cash offsetting this, leading to net cash of JP¥10.3b.

How Strong Is AS ONE's Balance Sheet?

The latest balance sheet data shows that AS ONE had liabilities of JP¥26.1b due within a year, and liabilities of JP¥5.07b falling due after that. On the other hand, it had cash of JP¥13.9b and JP¥35.7b worth of receivables due within a year. So it can boast JP¥18.4b more liquid assets than total liabilities.

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

On the other hand, AS ONE saw its EBIT drop by 8.4% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine AS ONE'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, a company can only pay off debt with cold hard cash, not accounting profits. While AS ONE 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, AS ONE produced sturdy free cash flow equating to 59% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that AS ONE has net cash of JP¥10.3b, as well as more liquid assets than liabilities. So is AS ONE's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with AS ONE , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com