Auto Server (TSE:5589) Could Easily Take On More Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Auto Server Co., Ltd. (TSE:5589) does use debt in its business. But is this debt a concern to shareholders?

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What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is Auto Server's Debt?

The image below, which you can click on for greater detail, shows that Auto Server had debt of JP¥2.27b at the end of March 2025, a reduction from JP¥2.90b over a year. But on the other hand it also has JP¥13.0b in cash, leading to a JP¥10.7b net cash position.

How Healthy Is Auto Server's Balance Sheet?

According to the last reported balance sheet, Auto Server had liabilities of JP¥8.95b due within 12 months, and liabilities of JP¥273.2m due beyond 12 months. On the other hand, it had cash of JP¥13.0b and JP¥3.43b worth of receivables due within a year. So it actually has JP¥7.22b more liquid assets than total liabilities.

This surplus strongly suggests that Auto Server has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Auto Server boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Auto Server

Fortunately, Auto Server grew its EBIT by 9.5% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But it is Auto Server'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, a company can only pay off debt with cold hard cash, not accounting profits. Auto Server 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 three years, Auto Server's free cash flow amounted to 41% of its EBIT, less 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 Auto Server has JP¥10.7b in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 9.5% in the last twelve months. So we don't think Auto Server's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Auto Server's earnings per share history for free.

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.

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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.