Is MANAC Chemical PartnersLtd (TSE:4360) Using Too Much Debt?

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 can see that MANAC Chemical Partners Co.,Ltd (TSE:4360) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for MANAC Chemical PartnersLtd

What Is MANAC Chemical PartnersLtd's Debt?

As you can see below, at the end of December 2023, MANAC Chemical PartnersLtd had JP¥332.0m of debt, up from JP¥312.0m a year ago. Click the image for more detail. But it also has JP¥3.23b in cash to offset that, meaning it has JP¥2.90b net cash.

How Strong Is MANAC Chemical PartnersLtd's Balance Sheet?

According to the last reported balance sheet, MANAC Chemical PartnersLtd had liabilities of JP¥3.11b due within 12 months, and liabilities of JP¥105.0m due beyond 12 months. On the other hand, it had cash of JP¥3.23b and JP¥2.41b worth of receivables due within a year. So it can boast JP¥2.43b more liquid assets than total liabilities.

This excess liquidity is a great indication that MANAC Chemical PartnersLtd's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, MANAC Chemical PartnersLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for MANAC Chemical PartnersLtd if management cannot prevent a repeat of the 97% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is MANAC Chemical PartnersLtd's earnings that will influence how the balance sheet holds up in the future. 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. While MANAC Chemical PartnersLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, MANAC Chemical PartnersLtd actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that MANAC Chemical PartnersLtd has net cash of JP¥2.90b, as well as more liquid assets than liabilities. The cherry on top was that in converted 150% of that EBIT to free cash flow, bringing in JP¥722m. So is MANAC Chemical PartnersLtd's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 6 warning signs we've spotted with MANAC Chemical PartnersLtd (including 1 which is significant) .

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.