These 4 Measures Indicate That AFC-HD AMS Life Science (TYO:2927) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 AFC-HD AMS Life Science Co., Ltd. (TYO:2927) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for AFC-HD AMS Life Science

What Is AFC-HD AMS Life Science's Net Debt?

The chart below, which you can click on for greater detail, shows that AFC-HD AMS Life Science had JP¥4.00b in debt in February 2021; about the same as the year before. But on the other hand it also has JP¥5.99b in cash, leading to a JP¥1.99b net cash position.

How Strong Is AFC-HD AMS Life Science's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that AFC-HD AMS Life Science had liabilities of JP¥7.94b due within 12 months and liabilities of JP¥1.12b due beyond that. Offsetting this, it had JP¥5.99b in cash and JP¥1.90b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥1.17b.

Given AFC-HD AMS Life Science has a market capitalization of JP¥15.0b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, AFC-HD AMS Life Science boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, AFC-HD AMS Life Science grew its EBIT by 63% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is AFC-HD AMS Life Science's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While AFC-HD AMS Life Science 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 last three years, AFC-HD AMS Life Science recorded free cash flow worth a fulsome 99% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that AFC-HD AMS Life Science has JP¥1.99b in net cash. And it impressed us with free cash flow of JP¥2.0b, being 99% of its EBIT. So is AFC-HD AMS Life Science's debt a risk? It doesn't seem so to us. 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 instance, we've identified 1 warning sign for AFC-HD AMS Life Science that you should be aware of.

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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