ABC-MartInc (TSE:2670) Seems To Use Debt Rather Sparingly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 ABC-Mart,Inc. (TSE:2670) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

Check out our latest analysis for ABC-MartInc

How Much Debt Does ABC-MartInc Carry?

The image below, which you can click on for greater detail, shows that ABC-MartInc had debt of JP¥4.24b at the end of May 2024, a reduction from JP¥4.86b over a year. But on the other hand it also has JP¥177.0b in cash, leading to a JP¥172.7b net cash position.

A Look At ABC-MartInc's Liabilities

We can see from the most recent balance sheet that ABC-MartInc had liabilities of JP¥52.2b falling due within a year, and liabilities of JP¥1.76b due beyond that. On the other hand, it had cash of JP¥177.0b and JP¥20.7b worth of receivables due within a year. So it can boast JP¥143.7b more liquid assets than total liabilities.

It's good to see that ABC-MartInc has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that ABC-MartInc has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that ABC-MartInc grew its EBIT at 18% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if ABC-MartInc can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. ABC-MartInc 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. Over the most recent three years, ABC-MartInc recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case ABC-MartInc has JP¥172.7b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 18% over the last year. So is ABC-MartInc's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 1 warning sign for ABC-MartInc you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.