We Think ISE Chemicals (TSE:4107) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, ISE Chemicals Corporation (TSE:4107) does carry debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

See our latest analysis for ISE Chemicals

What Is ISE Chemicals's Net Debt?

As you can see below, ISE Chemicals had JP¥600.0m of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds JP¥8.69b in cash, so it actually has JP¥8.09b net cash.

A Look At ISE Chemicals' Liabilities

We can see from the most recent balance sheet that ISE Chemicals had liabilities of JP¥6.97b falling due within a year, and liabilities of JP¥1.49b due beyond that. Offsetting this, it had JP¥8.69b in cash and JP¥7.63b in receivables that were due within 12 months. So it actually has JP¥7.86b 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. Succinctly put, ISE Chemicals boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, ISE Chemicals grew its EBIT by 32% over the last twelve months, and that growth will make it easier to handle its debt. 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 17% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case ISE Chemicals has JP¥8.09b in net cash and a decent-looking balance sheet. And we liked the look of last year's 32% year-on-year EBIT growth. 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. For instance, we've identified 2 warning signs for ISE Chemicals that you should be aware of.

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.