We Think Macbee Planet (TSE:7095) Can Manage Its Debt With Ease

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Macbee Planet, Inc. (TSE:7095) does use debt in its business. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Macbee Planet

What Is Macbee Planet's Debt?

As you can see below, at the end of October 2023, Macbee Planet had JP¥3.53b of debt, up from JP¥1.13b a year ago. Click the image for more detail. However, its balance sheet shows it holds JP¥9.45b in cash, so it actually has JP¥5.92b net cash.

How Strong Is Macbee Planet's Balance Sheet?

The latest balance sheet data shows that Macbee Planet had liabilities of JP¥7.82b due within a year, and liabilities of JP¥1.73b falling due after that. Offsetting these obligations, it had cash of JP¥9.45b as well as receivables valued at JP¥4.61b due within 12 months. So it actually has JP¥4.51b more liquid assets than total liabilities.

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

Better yet, Macbee Planet grew its EBIT by 114% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Macbee Planet's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Macbee Planet 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. Over the most recent three years, Macbee Planet recorded free cash flow worth 70% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Macbee Planet has net cash of JP¥5.92b, as well as more liquid assets than liabilities. And we liked the look of last year's 114% year-on-year EBIT growth. So is Macbee Planet's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Macbee Planet (of which 1 can't be ignored!) you should know about.

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.