Is Value CreationLtd (TSE:9238) A Risky Investment?

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.' 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 Value Creation Co.,Ltd. (TSE:9238) 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?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

How Much Debt Does Value CreationLtd Carry?

As you can see below, Value CreationLtd had JP¥685.2m of debt at May 2025, down from JP¥723.0m a year prior. However, its balance sheet shows it holds JP¥831.4m in cash, so it actually has JP¥146.2m net cash.

A Look At Value CreationLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Value CreationLtd had liabilities of JP¥3.79b due within 12 months and liabilities of JP¥366.7m due beyond that. On the other hand, it had cash of JP¥831.4m and JP¥3.14b worth of receivables due within a year. So its liabilities total JP¥191.6m more than the combination of its cash and short-term receivables.

Given Value CreationLtd has a market capitalization of JP¥3.67b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Value CreationLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

See our latest analysis for Value CreationLtd

Fortunately, Value CreationLtd grew its EBIT by 2.2% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But it is Value CreationLtd'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. While Value CreationLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Value CreationLtd actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Value CreationLtd has JP¥146.2m in net cash. The cherry on top was that in converted 139% of that EBIT to free cash flow, bringing in JP¥136m. So is Value CreationLtd's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Value CreationLtd (including 1 which doesn't sit too well with us) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.