ASKUL (TSE:2678) Seems To Use Debt Quite Sensibly

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 ASKUL Corporation (TSE:2678) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for ASKUL

What Is ASKUL's Debt?

The image below, which you can click on for greater detail, shows that ASKUL had debt of JP¥17.0b at the end of August 2024, a reduction from JP¥20.0b over a year. But it also has JP¥57.1b in cash to offset that, meaning it has JP¥40.1b net cash.

How Healthy Is ASKUL's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ASKUL had liabilities of JP¥107.3b due within 12 months and liabilities of JP¥40.4b due beyond that. Offsetting this, it had JP¥57.1b in cash and JP¥67.6b in receivables that were due within 12 months. So it has liabilities totalling JP¥23.0b more than its cash and near-term receivables, combined.

Since publicly traded ASKUL shares are worth a total of JP¥193.6b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, ASKUL boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that ASKUL grew its EBIT by 15% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine ASKUL'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 ASKUL 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. Looking at the most recent three years, ASKUL recorded free cash flow of 34% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although ASKUL's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of JP¥40.1b. And we liked the look of last year's 15% year-on-year EBIT growth. So we don't have any problem with ASKUL's use of debt. 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. For example, we've discovered 2 warning signs for ASKUL (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.