These 4 Measures Indicate That Maruto Sangyo (FKSE:7894) Is Using Debt Safely

Warren Buffett famously said, '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. We note that Maruto Sangyo Co., Ltd. (FKSE:7894) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Maruto Sangyo

What Is Maruto Sangyo's Net Debt?

The image below, which you can click on for greater detail, shows that at November 2020 Maruto Sangyo had debt of JP¥1.43b, up from JP¥718.0m in one year. But on the other hand it also has JP¥3.32b in cash, leading to a JP¥1.89b net cash position.

How Strong Is Maruto Sangyo's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Maruto Sangyo had liabilities of JP¥5.75b due within 12 months and liabilities of JP¥1.18b due beyond that. Offsetting these obligations, it had cash of JP¥3.32b as well as receivables valued at JP¥4.31b due within 12 months. So it can boast JP¥700.0m more liquid assets than total liabilities.

This surplus suggests that Maruto Sangyo is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Maruto Sangyo has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Maruto Sangyo grew its EBIT by 52% 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 Maruto Sangyo's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Maruto Sangyo 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, Maruto Sangyo produced sturdy free cash flow equating to 75% of its EBIT, about what we'd expect. 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 Maruto Sangyo has net cash of JP¥1.89b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 52% over the last year. So is Maruto Sangyo's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Maruto Sangyo .

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. 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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