Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Asahi Intecc Co., Ltd. (TSE:7747) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Asahi Intecc
How Much Debt Does Asahi Intecc Carry?
The image below, which you can click on for greater detail, shows that Asahi Intecc had debt of JPÂ¥8.37b at the end of March 2024, a reduction from JPÂ¥13.6b over a year. However, it does have JPÂ¥37.9b in cash offsetting this, leading to net cash of JPÂ¥29.5b.
How Healthy Is Asahi Intecc's Balance Sheet?
The latest balance sheet data shows that Asahi Intecc had liabilities of JPÂ¥22.6b due within a year, and liabilities of JPÂ¥10.6b falling due after that. Offsetting these obligations, it had cash of JPÂ¥37.9b as well as receivables valued at JPÂ¥19.6b due within 12 months. So it actually has JPÂ¥24.2b more liquid assets than total liabilities.
This surplus suggests that Asahi Intecc has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Asahi Intecc boasts net cash, so it's fair to say it does not have a heavy debt load!
Fortunately, Asahi Intecc grew its EBIT by 8.1% 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 it is future earnings, more than anything, that will determine Asahi Intecc'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, a company can only pay off debt with cold hard cash, not accounting profits. While Asahi Intecc 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. Looking at the most recent three years, Asahi Intecc recorded free cash flow of 42% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Summing Up
While it is always sensible to investigate a company's debt, in this case Asahi Intecc has JPÂ¥29.5b in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 8.1% in the last twelve months. So we don't think Asahi Intecc's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Asahi Intecc, you may well want to click here to check an interactive graph of its earnings per share history.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.
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About TSE:7747
Asahi Intecc
Engages in the development, manufacture, and sale of medical devices in Japan, the United States, Europe, China, and internationally.
Flawless balance sheet with moderate growth potential.
