PeptiDream (TSE:4587) Has A Rock Solid Balance Sheet

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that PeptiDream Inc. (TSE:4587) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for PeptiDream

How Much Debt Does PeptiDream Carry?

The image below, which you can click on for greater detail, shows that PeptiDream had debt of JP¥19.6b at the end of December 2024, a reduction from JP¥22.2b over a year. However, its balance sheet shows it holds JP¥48.1b in cash, so it actually has JP¥28.5b net cash.

How Healthy Is PeptiDream's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that PeptiDream had liabilities of JP¥18.4b due within 12 months and liabilities of JP¥17.6b due beyond that. On the other hand, it had cash of JP¥48.1b and JP¥5.28b worth of receivables due within a year. So it actually has JP¥17.4b more liquid assets than total liabilities.

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

Even more impressive was the fact that PeptiDream grew its EBIT by 210% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine PeptiDream'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. PeptiDream 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 three years, PeptiDream produced sturdy free cash flow equating to 78% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that PeptiDream has net cash of JP¥28.5b, as well as more liquid assets than liabilities. And we liked the look of last year's 210% year-on-year EBIT growth. So we don't think PeptiDream's use of debt is risky. 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 1 warning sign with PeptiDream , 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.