Here's Why Rorze (TSE:6323) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Rorze Corporation (TSE:6323) does carry debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

See our latest analysis for Rorze

How Much Debt Does Rorze Carry?

You can click the graphic below for the historical numbers, but it shows that Rorze had JP¥32.2b of debt in May 2024, down from JP¥41.0b, one year before. However, it does have JP¥40.2b in cash offsetting this, leading to net cash of JP¥8.00b.

A Look At Rorze's Liabilities

According to the last reported balance sheet, Rorze had liabilities of JP¥34.7b due within 12 months, and liabilities of JP¥18.6b due beyond 12 months. Offsetting this, it had JP¥40.2b in cash and JP¥27.9b in receivables that were due within 12 months. So it actually has JP¥14.8b more liquid assets than total liabilities.

This surplus suggests that Rorze has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Rorze boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Rorze has increased its EBIT by 7.9% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Rorze can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Rorze 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. Over the last three years, Rorze reported free cash flow worth 13% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Rorze has net cash of JP¥8.00b, as well as more liquid assets than liabilities. And it also grew its EBIT by 7.9% over the last year. So we don't have any problem with Rorze's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Rorze that you should be aware of.

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.