Health Check: How Prudently Does D. Western Therapeutics Institute (TSE:4576) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies D. Western Therapeutics Institute, Inc. (TSE:4576) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for D. Western Therapeutics Institute

What Is D. Western Therapeutics Institute's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 D. Western Therapeutics Institute had debt of JP¥1.06b, up from JP¥825.0m in one year. But it also has JP¥1.16b in cash to offset that, meaning it has JP¥100.8m net cash.

A Look At D. Western Therapeutics Institute's Liabilities

Zooming in on the latest balance sheet data, we can see that D. Western Therapeutics Institute had liabilities of JP¥107.7m due within 12 months and liabilities of JP¥1.06b due beyond that. Offsetting these obligations, it had cash of JP¥1.16b as well as receivables valued at JP¥165.2m due within 12 months. So it can boast JP¥153.4m more liquid assets than total liabilities.

This surplus suggests that D. Western Therapeutics Institute has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, D. Western Therapeutics Institute boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is D. Western Therapeutics Institute'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.

In the last year D. Western Therapeutics Institute wasn't profitable at an EBIT level, but managed to grow its revenue by 2.5%, to JP¥463m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is D. Western Therapeutics Institute?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months D. Western Therapeutics Institute lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through JP¥1.3b of cash and made a loss of JP¥1.1b. With only JP¥100.8m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Be aware that D. Western Therapeutics Institute is showing 6 warning signs in our investment analysis , and 3 of those shouldn't be ignored...

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.