Here's Why Uniform Next (TSE:3566) Can Manage Its Debt Responsibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Uniform Next Co., Ltd. (TSE:3566) does use debt in its business. But is this debt a concern to shareholders?

Our free stock report includes 2 warning signs investors should be aware of before investing in Uniform Next. Read for free now.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Uniform Next's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Uniform Next had debt of JP¥408.0m, up from none in one year. But on the other hand it also has JP¥2.36b in cash, leading to a JP¥1.95b net cash position.

How Healthy Is Uniform Next's Balance Sheet?

The latest balance sheet data shows that Uniform Next had liabilities of JP¥1.28b due within a year, and liabilities of JP¥309.0m falling due after that. Offsetting these obligations, it had cash of JP¥2.36b as well as receivables valued at JP¥338.0m due within 12 months. So it can boast JP¥1.11b more liquid assets than total liabilities.

It's good to see that Uniform Next has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Uniform Next boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Uniform Next

But the bad news is that Uniform Next has seen its EBIT plunge 10% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But it is Uniform Next'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, a company can only pay off debt with cold hard cash, not accounting profits. While Uniform Next 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, Uniform Next recorded free cash flow of 35% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Uniform Next has JP¥1.95b in net cash and a decent-looking balance sheet. So we are not troubled with Uniform Next's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Uniform Next is showing 2 warning signs in our investment analysis , 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.