ISE Chemicals (TSE:4107) Has A Pretty Healthy Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that ISE Chemicals Corporation (TSE:4107) does use debt in its business. But should shareholders be worried about its use of debt?

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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for ISE Chemicals

How Much Debt Does ISE Chemicals Carry?

You can click the graphic below for the historical numbers, but it shows that ISE Chemicals had JP¥500.0m of debt in December 2024, down from JP¥600.0m, one year before. However, it does have JP¥8.69b in cash offsetting this, leading to net cash of JP¥8.19b.

A Look At ISE Chemicals' Liabilities

Zooming in on the latest balance sheet data, we can see that ISE Chemicals had liabilities of JP¥8.19b due within 12 months and liabilities of JP¥1.49b due beyond that. Offsetting this, it had JP¥8.69b in cash and JP¥8.92b in receivables that were due within 12 months. So it actually has JP¥7.92b more liquid assets than total liabilities.

This surplus suggests that ISE Chemicals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that ISE Chemicals has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that ISE Chemicals has boosted its EBIT by 45%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine ISE Chemicals's ability to maintain a healthy balance sheet going forward. 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. ISE Chemicals 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. Over the last three years, ISE Chemicals reported free cash flow worth 19% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that ISE Chemicals has net cash of JP¥8.19b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 45% over the last year. So we don't think ISE Chemicals's use of debt is risky. 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. Case in point: We've spotted 1 warning sign for ISE Chemicals 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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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.