Does ABC-MartInc (TSE:2670) Have A Healthy 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, ABC-Mart,Inc. (TSE:2670) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for ABC-MartInc

How Much Debt Does ABC-MartInc Carry?

You can click the graphic below for the historical numbers, but it shows that ABC-MartInc had JP¥4.11b of debt in November 2024, down from JP¥4.86b, one year before. However, its balance sheet shows it holds JP¥183.3b in cash, so it actually has JP¥179.2b net cash.

A Look At ABC-MartInc's Liabilities

Zooming in on the latest balance sheet data, we can see that ABC-MartInc had liabilities of JP¥57.7b due within 12 months and liabilities of JP¥1.72b due beyond that. Offsetting this, it had JP¥183.3b in cash and JP¥21.5b in receivables that were due within 12 months. So it actually has JP¥145.4b 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. Because it has plenty of assets, it is unlikely to have trouble 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 13% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine ABC-MartInc's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While ABC-MartInc 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. During the last three years, ABC-MartInc produced sturdy free cash flow equating to 63% 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 ABC-MartInc has net cash of JP¥179.2b, as well as more liquid assets than liabilities. So we don't think ABC-MartInc's use of debt is risky. 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. For example, we've discovered 1 warning sign for ABC-MartInc that you should be aware of before investing here.

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.