These 4 Measures Indicate That Generation PassLtd (TSE:3195) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Generation Pass Co.,Ltd. (TSE:3195) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Generation PassLtd

How Much Debt Does Generation PassLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of October 2024 Generation PassLtd had JP¥905.0m of debt, an increase on JP¥844.0m, over one year. But it also has JP¥1.25b in cash to offset that, meaning it has JP¥343.0m net cash.

How Healthy Is Generation PassLtd's Balance Sheet?

According to the last reported balance sheet, Generation PassLtd had liabilities of JP¥2.66b due within 12 months, and liabilities of JP¥94.0m due beyond 12 months. Offsetting these obligations, it had cash of JP¥1.25b as well as receivables valued at JP¥1.18b due within 12 months. So its liabilities total JP¥329.0m more than the combination of its cash and short-term receivables.

Of course, Generation PassLtd has a market capitalization of JP¥2.42b, so these liabilities are probably manageable. 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, Generation PassLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Generation PassLtd made a loss at the EBIT level, last year, it was also good to see that it generated JP¥82m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Generation PassLtd will need earnings to service that debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Generation PassLtd 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. Happily for any shareholders, Generation PassLtd actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Generation PassLtd does have more liabilities than liquid assets, it also has net cash of JP¥343.0m. And it impressed us with free cash flow of JP¥184m, being 224% of its EBIT. So we don't think Generation PassLtd's use of debt is risky. 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 3 warning signs with Generation PassLtd (at least 1 which is significant) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.