Is Asahi Intecc (TSE:7747) Using Too Much Debt?

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. Importantly, Asahi Intecc Co., Ltd. (TSE:7747) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Asahi Intecc

How Much Debt Does Asahi Intecc Carry?

As you can see below, Asahi Intecc had JP¥6.70b of debt at June 2024, down from JP¥14.3b a year prior. However, it does have JP¥38.7b in cash offsetting this, leading to net cash of JP¥32.0b.

A Look At Asahi Intecc's Liabilities

We can see from the most recent balance sheet that Asahi Intecc had liabilities of JP¥29.5b falling due within a year, and liabilities of JP¥10.2b due beyond that. Offsetting this, it had JP¥38.7b in cash and JP¥19.1b in receivables that were due within 12 months. So it can boast JP¥18.1b more liquid assets than total liabilities.

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

Also positive, Asahi Intecc grew its EBIT by 23% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Asahi Intecc 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Asahi Intecc 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. During the last three years, Asahi Intecc produced sturdy free cash flow equating to 71% 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 Asahi Intecc has net cash of JP¥32.0b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 23% over the last year. So we don't think Asahi Intecc's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Asahi Intecc's earnings per share history for free.

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.