DIGITALIFT (TSE:9244) Seems To Use Debt Quite Sensibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies DIGITALIFT Inc. (TSE:9244) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for DIGITALIFT

How Much Debt Does DIGITALIFT Carry?

As you can see below, at the end of September 2024, DIGITALIFT had JP¥1.22b of debt, up from JP¥713.0m a year ago. Click the image for more detail. But on the other hand it also has JP¥1.56b in cash, leading to a JP¥340.0m net cash position.

How Strong Is DIGITALIFT's Balance Sheet?

According to the last reported balance sheet, DIGITALIFT had liabilities of JP¥1.27b due within 12 months, and liabilities of JP¥392.0m due beyond 12 months. Offsetting these obligations, it had cash of JP¥1.56b as well as receivables valued at JP¥453.0m due within 12 months. So it can boast JP¥356.0m more liquid assets than total liabilities.

This surplus strongly suggests that DIGITALIFT 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. Simply put, the fact that DIGITALIFT has more cash than debt is arguably a good indication that it can manage its debt safely.

Shareholders should be aware that DIGITALIFT's EBIT was down 66% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since DIGITALIFT 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. While DIGITALIFT 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. Looking at the most recent two years, DIGITALIFT recorded free cash flow of 40% of its EBIT, which is weaker 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 DIGITALIFT has JP¥340.0m in net cash and a decent-looking balance sheet. So we are not troubled with DIGITALIFT's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that DIGITALIFT is showing 4 warning signs in our investment analysis , and 3 of those are a bit unpleasant...

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.