Here's Why JADE GROUPInc (TSE:3558) Can Manage Its Debt Responsibly

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 JADE GROUP,Inc (TSE:3558) does use debt in its business. But the real question is whether this debt is making the company risky.

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When Is Debt Dangerous?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is JADE GROUPInc's Net Debt?

The image below, which you can click on for greater detail, shows that at November 2024 JADE GROUPInc had debt of JP¥1.52b, up from JP¥646.0m in one year. However, its balance sheet shows it holds JP¥3.36b in cash, so it actually has JP¥1.84b net cash.

How Healthy Is JADE GROUPInc's Balance Sheet?

According to the last reported balance sheet, JADE GROUPInc had liabilities of JP¥6.97b due within 12 months, and liabilities of JP¥924.0m due beyond 12 months. On the other hand, it had cash of JP¥3.36b and JP¥2.38b worth of receivables due within a year. So its liabilities total JP¥2.15b more than the combination of its cash and short-term receivables.

Of course, JADE GROUPInc has a market capitalization of JP¥11.2b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, JADE GROUPInc also has more cash than debt, so we're pretty confident it can manage its debt safely.

Check out our latest analysis for JADE GROUPInc

The modesty of its debt load may become crucial for JADE GROUPInc if management cannot prevent a repeat of the 36% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is JADE GROUPInc'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. While JADE GROUPInc 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, JADE GROUPInc generated free cash flow amounting to a very robust 93% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While JADE GROUPInc does have more liabilities than liquid assets, it also has net cash of JP¥1.84b. The cherry on top was that in converted 93% of that EBIT to free cash flow, bringing in JP¥1.5b. So we are not troubled with JADE GROUPInc's debt use. 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 JADE GROUPInc has 4 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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.