These 4 Measures Indicate That Lasertec (TSE:6920) Is Using Debt Reasonably Well

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. We note that Lasertec Corporation (TSE:6920) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, 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.

Check out our latest analysis for Lasertec

How Much Debt Does Lasertec Carry?

You can click the graphic below for the historical numbers, but it shows that Lasertec had JP¥10.0b of debt in September 2024, down from JP¥15.0b, one year before. However, its balance sheet shows it holds JP¥30.7b in cash, so it actually has JP¥20.7b net cash.

A Look At Lasertec's Liabilities

We can see from the most recent balance sheet that Lasertec had liabilities of JP¥115.8b falling due within a year, and liabilities of JP¥1.48b due beyond that. Offsetting these obligations, it had cash of JP¥30.7b as well as receivables valued at JP¥14.0b due within 12 months. So its liabilities total JP¥72.7b more than the combination of its cash and short-term receivables.

Of course, Lasertec has a market capitalization of JP¥1.48t, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Lasertec also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Lasertec has boosted its EBIT by 36%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Lasertec can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Lasertec 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. In the last three years, Lasertec's free cash flow amounted to 21% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Lasertec's liabilities, but we can be reassured by the fact it has has net cash of JP¥20.7b. And it impressed us with its EBIT growth of 36% over the last year. So we don't think Lasertec'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. For example, we've discovered 2 warning signs for Lasertec that you should be aware of before investing here.

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.