LINTEC (TSE:7966) Seems To Use Debt Rather Sparingly

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.' 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 LINTEC Corporation (TSE:7966) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for LINTEC

How Much Debt Does LINTEC Carry?

The image below, which you can click on for greater detail, shows that LINTEC had debt of JP¥6.71b at the end of September 2024, a reduction from JP¥9.86b over a year. However, its balance sheet shows it holds JP¥53.0b in cash, so it actually has JP¥46.3b net cash.

How Strong Is LINTEC's Balance Sheet?

According to the last reported balance sheet, LINTEC had liabilities of JP¥70.1b due within 12 months, and liabilities of JP¥25.1b due beyond 12 months. On the other hand, it had cash of JP¥53.0b and JP¥69.0b worth of receivables due within a year. So it actually has JP¥26.8b more liquid assets than total liabilities.

This surplus suggests that LINTEC has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that LINTEC has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that LINTEC grew its EBIT by 193% over twelve months. 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 LINTEC 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. LINTEC 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. Looking at the most recent three years, LINTEC recorded free cash flow of 43% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that LINTEC has net cash of JP¥46.3b, as well as more liquid assets than liabilities. And we liked the look of last year's 193% year-on-year EBIT growth. So is LINTEC's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with LINTEC , and understanding them should be part of your investment process.

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.