Does Mental Health TechnologiesLtd (TSE:9218) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Mental Health Technologies Co.,Ltd. (TSE:9218) does carry debt. But the real question is whether this debt is making the company risky.

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

What Is Mental Health TechnologiesLtd's Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Mental Health TechnologiesLtd had debt of JP¥331.0m, up from JP¥181.0m in one year. But it also has JP¥913.0m in cash to offset that, meaning it has JP¥582.0m net cash.

How Healthy Is Mental Health TechnologiesLtd's Balance Sheet?

We can see from the most recent balance sheet that Mental Health TechnologiesLtd had liabilities of JP¥405.0m falling due within a year, and liabilities of JP¥214.0m due beyond that. On the other hand, it had cash of JP¥913.0m and JP¥391.0m worth of receivables due within a year. So it can boast JP¥685.0m more liquid assets than total liabilities.

This surplus suggests that Mental Health TechnologiesLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Mental Health TechnologiesLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Mental Health TechnologiesLtd has boosted its EBIT by 35%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Mental Health TechnologiesLtd'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Mental Health TechnologiesLtd 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. Over the most recent three years, Mental Health TechnologiesLtd recorded free cash flow worth 61% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Mental Health TechnologiesLtd has net cash of JP¥582.0m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 35% over the last year. So we don't think Mental Health TechnologiesLtd's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Mental Health TechnologiesLtd has 4 warning signs (and 2 which are concerning) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.