Is Chugoku Marine Paints (TSE:4617) A Risky Investment?

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.' 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. As with many other companies Chugoku Marine Paints, Ltd. (TSE:4617) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Chugoku Marine Paints

What Is Chugoku Marine Paints's Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Chugoku Marine Paints had debt of JP¥29.0b, up from JP¥25.3b in one year. But it also has JP¥32.3b in cash to offset that, meaning it has JP¥3.33b net cash.

How Healthy Is Chugoku Marine Paints' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Chugoku Marine Paints had liabilities of JP¥49.2b due within 12 months and liabilities of JP¥9.31b due beyond that. Offsetting these obligations, it had cash of JP¥32.3b as well as receivables valued at JP¥40.1b due within 12 months. So it actually has JP¥14.0b more liquid assets than total liabilities.

This surplus suggests that Chugoku Marine Paints has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Chugoku Marine Paints boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Chugoku Marine Paints grew its EBIT by 649% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Chugoku Marine Paints can strengthen its balance sheet over time. 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. 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. In the last three years, Chugoku Marine Paints's free cash flow amounted to 47% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Chugoku Marine Paints has JP¥3.33b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 649% over the last year. So we don't think Chugoku Marine Paints's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Chugoku Marine Paints that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.