We Think Immuno-Biological Laboratories (TSE:4570) 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 note that Immuno-Biological Laboratories Co., Ltd. (TSE:4570) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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

How Much Debt Does Immuno-Biological Laboratories Carry?

As you can see below, Immuno-Biological Laboratories had JP¥236.0m of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has JP¥629.0m in cash, leading to a JP¥393.0m net cash position.

How Strong Is Immuno-Biological Laboratories' Balance Sheet?

The latest balance sheet data shows that Immuno-Biological Laboratories had liabilities of JP¥235.0m due within a year, and liabilities of JP¥100.0m falling due after that. Offsetting this, it had JP¥629.0m in cash and JP¥178.0m in receivables that were due within 12 months. So it can boast JP¥472.0m 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.

On top of that, Immuno-Biological Laboratories grew its EBIT by 59% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Immuno-Biological Laboratories 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Immuno-Biological Laboratories 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. During the last two years, Immuno-Biological Laboratories generated free cash flow amounting to a very robust 90% 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¥393.0m, as well as more liquid assets than liabilities. The cherry on top was that in converted 90% of that EBIT to free cash flow, bringing in JP¥83m. So we don't think Immuno-Biological Laboratories's use of debt is risky. 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. We've identified 2 warning signs with Immuno-Biological Laboratories , and understanding them should be part of your investment process.

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.