Here's Why ULVAC (TSE:6728) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 ULVAC, Inc. (TSE:6728) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 ULVAC

How Much Debt Does ULVAC Carry?

The image below, which you can click on for greater detail, shows that at June 2024 ULVAC had debt of JP¥46.8b, up from JP¥42.0b in one year. However, it does have JP¥96.3b in cash offsetting this, leading to net cash of JP¥49.6b.

How Healthy Is ULVAC's Balance Sheet?

The latest balance sheet data shows that ULVAC had liabilities of JP¥116.4b due within a year, and liabilities of JP¥44.5b falling due after that. Offsetting these obligations, it had cash of JP¥96.3b as well as receivables valued at JP¥102.8b due within 12 months. So it actually has JP¥38.2b more liquid assets than total liabilities.

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

On top of that, ULVAC grew its EBIT by 49% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. 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'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. 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. In the last three years, ULVAC created free cash flow amounting to 11% of its EBIT, an uninspiring performance. 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 ULVAC has net cash of JP¥49.6b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 49% over the last year. So we don't think ULVAC's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with ULVAC , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.