Chugoku Marine Paints (TSE:4617) Has A Rock Solid Balance Sheet

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 note that Chugoku Marine Paints, Ltd. (TSE:4617) does have debt on its balance sheet. But is this debt a concern to shareholders?

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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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Chugoku Marine Paints's Debt?

You can click the graphic below for the historical numbers, but it shows that Chugoku Marine Paints had JP¥23.3b of debt in December 2024, down from JP¥29.0b, one year before. However, it does have JP¥34.0b in cash offsetting this, leading to net cash of JP¥10.6b.

A Look At Chugoku Marine Paints' Liabilities

According to the last reported balance sheet, Chugoku Marine Paints had liabilities of JP¥48.4b due within 12 months, and liabilities of JP¥8.15b due beyond 12 months. On the other hand, it had cash of JP¥34.0b and JP¥39.7b worth of receivables due within a year. So it can boast JP¥17.1b more liquid assets than total liabilities.

It's good to see that Chugoku Marine Paints has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Chugoku Marine Paints has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Chugoku Marine Paints

In addition to that, we're happy to report that Chugoku Marine Paints has boosted its EBIT by 31%, 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 Chugoku Marine Paints'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Chugoku Marine Paints 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 most recent three years, Chugoku Marine Paints recorded free cash flow worth 59% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Chugoku Marine Paints has JP¥10.6b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 31% over the last year. So is Chugoku Marine Paints's debt a risk? It doesn't seem so to us. Given Chugoku Marine Paints 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 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.