OPTiM (TSE:3694) Seems To Use Debt Quite Sensibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, OPTiM Corporation (TSE:3694) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for OPTiM

How Much Debt Does OPTiM Carry?

As you can see below, OPTiM had JP¥314.0m of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have JP¥1.90b in cash offsetting this, leading to net cash of JP¥1.59b.

How Healthy Is OPTiM's Balance Sheet?

According to the last reported balance sheet, OPTiM had liabilities of JP¥2.08b due within 12 months, and liabilities of JP¥141.0m due beyond 12 months. On the other hand, it had cash of JP¥1.90b and JP¥2.49b worth of receivables due within a year. So it can boast JP¥2.17b more liquid assets than total liabilities.

This surplus suggests that OPTiM has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that OPTiM has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that OPTiM grew its EBIT by 11% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine OPTiM'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While OPTiM 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, OPTiM reported free cash flow worth 14% 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 we empathize with investors who find debt concerning, you should keep in mind that OPTiM has net cash of JP¥1.59b, as well as more liquid assets than liabilities. And it also grew its EBIT by 11% over the last year. So we are not troubled with OPTiM's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in OPTiM, you may well want to click here to check an interactive graph of its earnings per share history.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com