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.' 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. We can see that Applied Co.,Ltd. (TSE:3020) does use debt in its business. 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is AppliedLtd's Net Debt?
The image below, which you can click on for greater detail, shows that AppliedLtd had debt of JP¥397.0m at the end of March 2025, a reduction from JP¥652.0m over a year. But on the other hand it also has JP¥5.97b in cash, leading to a JP¥5.57b net cash position.
A Look At AppliedLtd's Liabilities
We can see from the most recent balance sheet that AppliedLtd had liabilities of JP¥7.50b falling due within a year, and liabilities of JP¥724.0m due beyond that. Offsetting these obligations, it had cash of JP¥5.97b as well as receivables valued at JP¥7.48b due within 12 months. So it can boast JP¥5.23b more liquid assets than total liabilities.
This surplus strongly suggests that AppliedLtd has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that AppliedLtd has more cash than debt is arguably a good indication that it can manage its debt safely.
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Another good sign is that AppliedLtd has been able to increase its EBIT by 26% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But it is AppliedLtd'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. AppliedLtd 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 last three years, AppliedLtd recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that AppliedLtd has net cash of JP¥5.57b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥2.7b, being 82% of its EBIT. At the end of the day we're not concerned about AppliedLtd's 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 3 warning signs for AppliedLtd 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.