Does ULVAC (TSE:6728) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that ULVAC, Inc. (TSE:6728) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for ULVAC

What Is ULVAC's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 ULVAC had debt of JP¥44.8b, up from JP¥40.7b in one year. But on the other hand it also has JP¥91.6b in cash, leading to a JP¥46.8b net cash position.

How Strong Is ULVAC's Balance Sheet?

According to the last reported balance sheet, ULVAC had liabilities of JP¥106.4b due within 12 months, and liabilities of JP¥42.9b due beyond 12 months. Offsetting this, it had JP¥91.6b in cash and JP¥89.7b in receivables that were due within 12 months. So it can boast JP¥32.1b more liquid assets than total liabilities.

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

In addition to that, we're happy to report that ULVAC has boosted its EBIT by 85%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine ULVAC's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. ULVAC 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. Over the last three years, ULVAC reported free cash flow worth 13% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case ULVAC has JP¥46.8b in net cash and a decent-looking balance sheet. And we liked the look of last year's 85% year-on-year EBIT growth. So we don't think ULVAC's use of debt is risky. 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. We've identified 2 warning signs with ULVAC , and understanding them should be part of your investment process.

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.