Is Showa Paxxs (TSE:3954) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that Showa Paxxs Corporation (TSE:3954) does use debt in its business. But should shareholders be worried about its use of debt?

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What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

What Is Showa Paxxs's Debt?

As you can see below, Showa Paxxs had JP¥1.33b of debt, at September 2025, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has JP¥9.37b in cash, leading to a JP¥8.04b net cash position.

How Healthy Is Showa Paxxs' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Showa Paxxs had liabilities of JP¥7.19b due within 12 months and liabilities of JP¥2.29b due beyond that. On the other hand, it had cash of JP¥9.37b and JP¥7.00b worth of receivables due within a year. So it can boast JP¥6.89b more liquid assets than total liabilities.

This surplus strongly suggests that Showa Paxxs has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Showa Paxxs has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for Showa Paxxs

Another good sign is that Showa Paxxs has been able to increase its EBIT by 24% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Showa Paxxs will need earnings to service that debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Showa Paxxs 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. Looking at the most recent three years, Showa Paxxs 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 we empathize with investors who find debt concerning, you should keep in mind that Showa Paxxs has net cash of JP¥8.04b, as well as more liquid assets than liabilities. And we liked the look of last year's 24% year-on-year EBIT growth. So is Showa Paxxs's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Showa Paxxs .

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.