Is Jason (TYO:3080) Using Too Much Debt?

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. As with many other companies Jason Co., Ltd. (TYO:3080) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Jason

How Much Debt Does Jason Carry?

You can click the graphic below for the historical numbers, but it shows that as of November 2020 Jason had JP¥903.0m of debt, an increase on JP¥859.0m, over one year. However, it does have JP¥3.60b in cash offsetting this, leading to net cash of JP¥2.69b.

A Look At Jason's Liabilities

According to the last reported balance sheet, Jason had liabilities of JP¥3.77b due within 12 months, and liabilities of JP¥906.0m due beyond 12 months. Offsetting this, it had JP¥3.60b in cash and JP¥432.0m in receivables that were due within 12 months. So it has liabilities totalling JP¥646.0m more than its cash and near-term receivables, combined.

Since publicly traded Jason shares are worth a total of JP¥8.43b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Jason boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Jason grew its EBIT by 77% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jason 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Jason 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, Jason generated free cash flow amounting to a very robust 93% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

We could understand if investors are concerned about Jason's liabilities, but we can be reassured by the fact it has has net cash of JP¥2.69b. And it impressed us with free cash flow of JP¥1.1b, being 93% of its EBIT. So we don't think Jason'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. For example, we've discovered 1 warning sign for Jason that you should be aware of before investing here.

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. 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.
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