Immuno-Biological Laboratories (TSE:4570) Seems To Use Debt Rather Sparingly

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 Immuno-Biological Laboratories Co., Ltd. (TSE:4570) makes use of debt. But the more important question is: how much risk is that debt creating?

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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Immuno-Biological Laboratories

What Is Immuno-Biological Laboratories's Debt?

The chart below, which you can click on for greater detail, shows that Immuno-Biological Laboratories had JP¥235.0m in debt in March 2024; about the same as the year before. But on the other hand it also has JP¥734.0m in cash, leading to a JP¥499.0m net cash position.

How Strong Is Immuno-Biological Laboratories' Balance Sheet?

According to the last reported balance sheet, Immuno-Biological Laboratories had liabilities of JP¥257.0m due within 12 months, and liabilities of JP¥96.0m due beyond 12 months. Offsetting this, it had JP¥734.0m in cash and JP¥190.0m in receivables that were due within 12 months. So it actually has JP¥571.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Immuno-Biological Laboratories could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Immuno-Biological Laboratories has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Immuno-Biological Laboratories grew its EBIT by 112% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is Immuno-Biological Laboratories's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Immuno-Biological Laboratories 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. During the last two years, Immuno-Biological Laboratories generated free cash flow amounting to a very robust 87% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Immuno-Biological Laboratories has net cash of JP¥499.0m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥115m, being 87% of its EBIT. So we don't think Immuno-Biological Laboratories's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Immuno-Biological Laboratories , and understanding them should be part of your investment process.

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.

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