These 4 Measures Indicate That USS (TSE:4732) Is Using Debt Safely

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, USS Co., Ltd. (TSE:4732) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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.

View our latest analysis for USS

What Is USS's Net Debt?

As you can see below, USS had JP¥2.41b of debt at December 2024, down from JP¥2.77b a year prior. However, it does have JP¥90.3b in cash offsetting this, leading to net cash of JP¥87.9b.

How Strong Is USS' Balance Sheet?

We can see from the most recent balance sheet that USS had liabilities of JP¥25.5b falling due within a year, and liabilities of JP¥9.14b due beyond that. Offsetting this, it had JP¥90.3b in cash and JP¥9.99b in receivables that were due within 12 months. So it can boast JP¥65.6b more liquid assets than total liabilities.

This short term liquidity is a sign that USS could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that USS has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that USS grew its EBIT by 11% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine USS's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. USS 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, USS produced sturdy free cash flow equating to 68% 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 USS has net cash of JP¥87.9b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥33b, being 68% of its EBIT. So is USS's debt a risk? It doesn't seem so to us. Given USS has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

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.