Here's Why Carlit (TSE:4275) Can Manage Its Debt Responsibly

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. We note that Carlit Co., Ltd. (TSE:4275) does have debt on its balance sheet. But is this debt a concern to shareholders?

We check all companies for important risks. See what we found for Carlit in our free report.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Carlit's Net Debt?

As you can see below, at the end of December 2024, Carlit had JP¥2.66b of debt, up from JP¥1.18b a year ago. Click the image for more detail. However, it does have JP¥3.85b in cash offsetting this, leading to net cash of JP¥1.19b.

A Look At Carlit's Liabilities

We can see from the most recent balance sheet that Carlit had liabilities of JP¥12.1b falling due within a year, and liabilities of JP¥7.09b due beyond that. On the other hand, it had cash of JP¥3.85b and JP¥12.1b worth of receivables due within a year. So its liabilities total JP¥3.26b more than the combination of its cash and short-term receivables.

Given Carlit has a market capitalization of JP¥23.3b, 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, Carlit boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Carlit

On the other hand, Carlit's EBIT dived 12%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Carlit's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Carlit 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, Carlit recorded free cash flow of 36% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While Carlit does have more liabilities than liquid assets, it also has net cash of JP¥1.19b. So we don't have any problem with Carlit's use of debt. Given Carlit has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

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.