Here's Why Neo Marketing (TSE:4196) Can Manage Its Debt Responsibly

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. As with many other companies Neo Marketing Inc. (TSE:4196) makes use of debt. But is this debt a concern to shareholders?

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 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Neo Marketing

What Is Neo Marketing's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Neo Marketing had JP¥546.0m of debt, an increase on JP¥454.0m, over one year. However, its balance sheet shows it holds JP¥815.0m in cash, so it actually has JP¥269.0m net cash.

A Look At Neo Marketing's Liabilities

We can see from the most recent balance sheet that Neo Marketing had liabilities of JP¥446.0m falling due within a year, and liabilities of JP¥431.0m due beyond that. Offsetting these obligations, it had cash of JP¥815.0m as well as receivables valued at JP¥219.0m due within 12 months. So it can boast JP¥157.0m more liquid assets than total liabilities.

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

It is just as well that Neo Marketing's load is not too heavy, because its EBIT was down 63% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Neo Marketing's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Neo Marketing 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. During the last three years, Neo Marketing generated free cash flow amounting to a very robust 80% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Neo Marketing has net cash of JP¥269.0m, as well as more liquid assets than liabilities. The cherry on top was that in converted 80% of that EBIT to free cash flow, bringing in JP¥166m. So we are not troubled with Neo Marketing's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Neo Marketing you should be aware of, and 1 of them is significant.

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.