Rorze (TSE:6323) Has A Pretty Healthy Balance Sheet

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.' 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 is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Rorze

What Is Rorze's Debt?

The image below, which you can click on for greater detail, shows that Rorze had debt of JP¥37.2b at the end of August 2024, a reduction from JP¥39.1b over a year. However, its balance sheet shows it holds JP¥55.1b in cash, so it actually has JP¥17.9b net cash.

How Healthy Is Rorze's Balance Sheet?

The latest balance sheet data shows that Rorze had liabilities of JP¥40.7b due within a year, and liabilities of JP¥19.8b falling due after that. Offsetting these obligations, it had cash of JP¥55.1b as well as receivables valued at JP¥26.9b due within 12 months. So it actually has JP¥21.4b 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. Simply put, the fact that Rorze has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Rorze grew its EBIT by 23% in the last year, and that should make it easier to pay down debt, going forward. 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 Rorze'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. Rorze 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. Looking at the most recent three years, Rorze recorded free cash flow of 35% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Rorze has net cash of JP¥17.9b, as well as more liquid assets than liabilities. And we liked the look of last year's 23% year-on-year EBIT growth. So is Rorze's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Rorze that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.