JADE GROUPInc (TSE:3558) Could Easily Take On More Debt

Warren Buffett famously said, '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. We note that JADE GROUP,Inc (TSE:3558) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for JADE GROUPInc

How Much Debt Does JADE GROUPInc Carry?

The chart below, which you can click on for greater detail, shows that JADE GROUPInc had JP¥646.0m in debt in November 2023; about the same as the year before. However, it does have JP¥3.56b in cash offsetting this, leading to net cash of JP¥2.91b.

A Look At JADE GROUPInc's Liabilities

According to the last reported balance sheet, JADE GROUPInc had liabilities of JP¥3.68b due within 12 months, and liabilities of JP¥558.0m due beyond 12 months. On the other hand, it had cash of JP¥3.56b and JP¥1.08b worth of receivables due within a year. So it can boast JP¥404.0m more liquid assets than total liabilities.

Having regard to JADE GROUPInc's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the JP¥26.2b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, JADE GROUPInc boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, JADE GROUPInc grew its EBIT by 70% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. JADE GROUPInc 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. During the last three years, JADE GROUPInc produced sturdy free cash flow equating to 72% of its EBIT, about what we'd expect. 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 JADE GROUPInc has net cash of JP¥2.91b, as well as more liquid assets than liabilities. And we liked the look of last year's 70% year-on-year EBIT growth. So is JADE GROUPInc'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. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with JADE GROUPInc , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.