Does Lancers (TSE:4484) Have A Healthy Balance Sheet?

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 Lancers, Inc. (TSE:4484) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Lancers's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2025 Lancers had debt of JP¥674.0m, up from JP¥644.0m in one year. However, it does have JP¥1.84b in cash offsetting this, leading to net cash of JP¥1.17b.

A Look At Lancers' Liabilities

According to the last reported balance sheet, Lancers had liabilities of JP¥1.38b due within 12 months, and liabilities of JP¥588.0m due beyond 12 months. Offsetting this, it had JP¥1.84b in cash and JP¥645.0m in receivables that were due within 12 months. So it can boast JP¥521.0m more liquid assets than total liabilities.

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

See our latest analysis for Lancers

It is just as well that Lancers's load is not too heavy, because its EBIT was down 44% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Lancers will need earnings to service that debt. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Lancers 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 two years, Lancers created free cash flow amounting to 18% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Lancers has net cash of JP¥1.17b, as well as more liquid assets than liabilities. So we are not troubled with Lancers's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Lancers , and understanding them should be part of your investment process.

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.