These 4 Measures Indicate That UP GARAGE GROUP (TSE:7134) Is Using Debt Reasonably Well

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. We note that UP GARAGE GROUP Co., Ltd. (TSE:7134) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for UP GARAGE GROUP

How Much Debt Does UP GARAGE GROUP Carry?

You can click the graphic below for the historical numbers, but it shows that UP GARAGE GROUP had JP¥353.0m of debt in December 2023, down from JP¥453.0m, one year before. But on the other hand it also has JP¥1.96b in cash, leading to a JP¥1.61b net cash position.

How Strong Is UP GARAGE GROUP's Balance Sheet?

According to the last reported balance sheet, UP GARAGE GROUP had liabilities of JP¥1.74b due within 12 months, and liabilities of JP¥383.0m due beyond 12 months. Offsetting this, it had JP¥1.96b in cash and JP¥964.0m in receivables that were due within 12 months. So it can boast JP¥799.0m more liquid assets than total liabilities.

This short term liquidity is a sign that UP GARAGE GROUP could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, UP GARAGE GROUP boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that UP GARAGE GROUP has increased its EBIT by 4.1% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is UP GARAGE GROUP's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. UP GARAGE GROUP 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. In the last three years, UP GARAGE GROUP's free cash flow amounted to 30% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case UP GARAGE GROUP has JP¥1.61b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 4.1% over the last year. So we don't have any problem with UP GARAGE GROUP's use of debt. 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. Case in point: We've spotted 2 warning signs for UP GARAGE GROUP you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.