Is Stella Pharma (TSE:4888) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that Stella Pharma Corporation (TSE:4888) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Stella Pharma

What Is Stella Pharma's Net Debt?

The image below, which you can click on for greater detail, shows that Stella Pharma had debt of JP¥853.0m at the end of September 2024, a reduction from JP¥1.01b over a year. But on the other hand it also has JP¥3.75b in cash, leading to a JP¥2.90b net cash position.

A Look At Stella Pharma's Liabilities

We can see from the most recent balance sheet that Stella Pharma had liabilities of JP¥219.0m falling due within a year, and liabilities of JP¥1.91b due beyond that. Offsetting this, it had JP¥3.75b in cash and JP¥118.0m in receivables that were due within 12 months. So it can boast JP¥1.74b more liquid assets than total liabilities.

This short term liquidity is a sign that Stella Pharma could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Stella Pharma has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Stella Pharma'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.

Over 12 months, Stella Pharma saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

So How Risky Is Stella Pharma?

Although Stella Pharma had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of JP¥93m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. To that end, you should be aware of the 2 warning signs we've spotted with Stella Pharma .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.