CRI Middleware (TSE:3698) Has A Rock Solid 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.' 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. Importantly, CRI Middleware Co., Ltd. (TSE:3698) does carry debt. But the real question is whether this debt is making the company risky.

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 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for CRI Middleware

What Is CRI Middleware's Net Debt?

As you can see below, CRI Middleware had JP¥1.00b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has JP¥3.63b in cash, leading to a JP¥2.63b net cash position.

A Look At CRI Middleware's Liabilities

Zooming in on the latest balance sheet data, we can see that CRI Middleware had liabilities of JP¥391.0m due within 12 months and liabilities of JP¥1.20b due beyond that. Offsetting these obligations, it had cash of JP¥3.63b as well as receivables valued at JP¥764.0m due within 12 months. So it actually has JP¥2.80b more liquid assets than total liabilities.

This excess liquidity is a great indication that CRI Middleware's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that CRI Middleware has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, CRI Middleware grew its EBIT by 7.3% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if CRI Middleware can strengthen its balance sheet over time. 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. CRI Middleware 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, CRI Middleware reported free cash flow worth 17% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case CRI Middleware has JP¥2.63b in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 7.3% in the last twelve months. So we don't think CRI Middleware'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. Case in point: We've spotted 1 warning sign for CRI Middleware you should be aware of.

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.