USS (TSE:4732) Has A Rock Solid Balance Sheet

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, USS Co., Ltd. (TSE:4732) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for USS

How Much Debt Does USS Carry?

You can click the graphic below for the historical numbers, but it shows that USS had JP¥2.53b of debt in June 2024, down from JP¥2.83b, one year before. However, its balance sheet shows it holds JP¥105.6b in cash, so it actually has JP¥103.1b net cash.

How Strong Is USS' Balance Sheet?

The latest balance sheet data shows that USS had liabilities of JP¥57.8b due within a year, and liabilities of JP¥9.38b falling due after that. On the other hand, it had cash of JP¥105.6b and JP¥27.0b worth of receivables due within a year. So it can boast JP¥65.4b more liquid assets than total liabilities.

This surplus suggests that USS has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that USS has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that USS grew its EBIT at 12% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept 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 generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that USS has net cash of JP¥103.1b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥41b, being 82% of its EBIT. So is USS's debt a risk? It doesn't seem so to us. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check USS's dividend history, without delay!

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.