We Think C.UyemuraLtd (TSE:4966) Can Manage Its Debt With Ease

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. We note that C.Uyemura & Co.,Ltd. (TSE:4966) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

What Is C.UyemuraLtd's Debt?

The chart below, which you can click on for greater detail, shows that C.UyemuraLtd had JP¥410.0m in debt in December 2024; about the same as the year before. But it also has JP¥43.7b in cash to offset that, meaning it has JP¥43.3b net cash.

A Look At C.UyemuraLtd's Liabilities

According to the last reported balance sheet, C.UyemuraLtd had liabilities of JP¥15.3b due within 12 months, and liabilities of JP¥6.29b due beyond 12 months. Offsetting this, it had JP¥43.7b in cash and JP¥24.6b in receivables that were due within 12 months. So it actually has JP¥46.6b more liquid assets than total liabilities.

This excess liquidity is a great indication that C.UyemuraLtd's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that C.UyemuraLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for C.UyemuraLtd

On top of that, C.UyemuraLtd grew its EBIT by 45% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if C.UyemuraLtd can strengthen its balance sheet over time. 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. While C.UyemuraLtd 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 most recent three years, C.UyemuraLtd recorded free cash flow worth 57% 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 we empathize with investors who find debt concerning, you should keep in mind that C.UyemuraLtd has net cash of JP¥43.3b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 45% over the last year. So is C.UyemuraLtd's debt a risk? It doesn't seem so to us. Given C.UyemuraLtd 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.