Is Watt Mann (TSE:9927) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Watt Mann Co., Ltd. (TSE:9927) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Watt Mann

How Much Debt Does Watt Mann Carry?

You can click the graphic below for the historical numbers, but it shows that Watt Mann had JP¥513.0m of debt in March 2024, down from JP¥630.0m, one year before. But it also has JP¥1.88b in cash to offset that, meaning it has JP¥1.36b net cash.

How Healthy Is Watt Mann's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Watt Mann had liabilities of JP¥1.28b due within 12 months and liabilities of JP¥428.0m due beyond that. On the other hand, it had cash of JP¥1.88b and JP¥252.0m worth of receivables due within a year. So it actually has JP¥423.0m more liquid assets than total liabilities.

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

Another good sign is that Watt Mann has been able to increase its EBIT by 28% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But it is Watt Mann'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Watt Mann 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, Watt Mann produced sturdy free cash flow equating to 69% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Watt Mann has JP¥1.36b in net cash and a decent-looking balance sheet. And we liked the look of last year's 28% year-on-year EBIT growth. So is Watt Mann's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Watt Mann you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com