Is MicroAd (TSE:9553) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies MicroAd, Inc. (TSE:9553) makes use of debt. But the real question is whether this debt is making the company risky.

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 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for MicroAd

What Is MicroAd's Debt?

As you can see below, at the end of March 2024, MicroAd had JP¥1.68b of debt, up from JP¥880.0m a year ago. Click the image for more detail. However, it does have JP¥2.83b in cash offsetting this, leading to net cash of JP¥1.15b.

A Look At MicroAd's Liabilities

Zooming in on the latest balance sheet data, we can see that MicroAd had liabilities of JP¥3.89b due within 12 months and liabilities of JP¥89.0m due beyond that. Offsetting these obligations, it had cash of JP¥2.83b as well as receivables valued at JP¥2.08b due within 12 months. So it can boast JP¥934.0m more liquid assets than total liabilities.

This surplus suggests that MicroAd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, MicroAd boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for MicroAd if management cannot prevent a repeat of the 41% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine MicroAd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While MicroAd 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. In the last three years, MicroAd created free cash flow amounting to 2.5% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that MicroAd has net cash of JP¥1.15b, as well as more liquid assets than liabilities. So we are not troubled with MicroAd's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with MicroAd , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com