Is ABC-MartInc (TSE:2670) Using Too Much Debt?

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.' 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 should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for ABC-MartInc

What Is ABC-MartInc's Debt?

As you can see below, ABC-MartInc had JP¥2.59b of debt at February 2024, down from JP¥9.93b a year prior. However, it does have JP¥176.4b in cash offsetting this, leading to net cash of JP¥173.8b.

How Strong Is ABC-MartInc's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ABC-MartInc had liabilities of JP¥44.0b due within 12 months and liabilities of JP¥1.71b due beyond that. On the other hand, it had cash of JP¥176.4b and JP¥16.0b worth of receivables due within a year. So it actually has JP¥146.7b more liquid assets than total liabilities.

This excess liquidity suggests that ABC-MartInc is taking a careful approach to debt. 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.

In addition to that, we're happy to report that ABC-MartInc has boosted its EBIT by 32%, thus reducing the spectre of future debt repayments. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. Over the most recent three years, ABC-MartInc recorded free cash flow worth 50% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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¥173.8b, as well as more liquid assets than liabilities. And we liked the look of last year's 32% year-on-year EBIT growth. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with ABC-MartInc , and understanding them should be part of your investment process.

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.