These 4 Measures Indicate That Weds (TYO:7551) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Weds Co., Ltd. (TYO:7551) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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.

View our latest analysis for Weds

What Is Weds's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Weds had JP¥2.06b of debt, an increase on JP¥149.0m, over one year. However, it does have JP¥3.69b in cash offsetting this, leading to net cash of JP¥1.64b.

How Healthy Is Weds's Balance Sheet?

The latest balance sheet data shows that Weds had liabilities of JP¥4.24b due within a year, and liabilities of JP¥2.73b falling due after that. Offsetting this, it had JP¥3.69b in cash and JP¥3.58b in receivables that were due within 12 months. So it actually has JP¥296.0m more liquid assets than total liabilities.

This surplus suggests that Weds has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Weds has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Weds if management cannot prevent a repeat of the 42% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is Weds'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Weds 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. In the last three years, Weds's free cash flow amounted to 44% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Weds has JP¥1.64b in net cash and a decent-looking balance sheet. So we are not troubled with Weds's debt use. 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. For instance, we've identified 3 warning signs for Weds (1 can't be ignored) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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