Does Maruichi Steel Tube (TSE:5463) Have A Healthy Balance Sheet?

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 can see that Maruichi Steel Tube Ltd. (TSE:5463) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Maruichi Steel Tube

What Is Maruichi Steel Tube's Debt?

You can click the graphic below for the historical numbers, but it shows that Maruichi Steel Tube had JP¥5.34b of debt in June 2024, down from JP¥8.57b, one year before. However, its balance sheet shows it holds JP¥102.7b in cash, so it actually has JP¥97.4b net cash.

A Look At Maruichi Steel Tube's Liabilities

The latest balance sheet data shows that Maruichi Steel Tube had liabilities of JP¥45.8b due within a year, and liabilities of JP¥29.9b falling due after that. Offsetting this, it had JP¥102.7b in cash and JP¥55.1b in receivables that were due within 12 months. So it actually has JP¥82.2b more liquid assets than total liabilities.

This surplus strongly suggests that Maruichi Steel Tube has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Maruichi Steel Tube has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Maruichi Steel Tube grew its EBIT by 10% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Maruichi Steel Tube'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. While Maruichi Steel Tube 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. Looking at the most recent three years, Maruichi Steel Tube recorded free cash flow of 49% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Maruichi Steel Tube has JP¥97.4b in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 10% in the last twelve months. So we don't think Maruichi Steel Tube'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. Be aware that Maruichi Steel Tube is showing 1 warning sign in our investment analysis , you should know about...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.