We Think Aplix (TSE:3727) Can Manage Its Debt With Ease

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Aplix Corporation (TSE:3727) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Aplix

How Much Debt Does Aplix Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Aplix had debt of JP¥616.0m, up from JP¥100.0m in one year. But it also has JP¥1.26b in cash to offset that, meaning it has JP¥646.0m net cash.

How Healthy Is Aplix's Balance Sheet?

According to the last reported balance sheet, Aplix had liabilities of JP¥845.0m due within 12 months, and liabilities of JP¥498.0m due beyond 12 months. Offsetting these obligations, it had cash of JP¥1.26b as well as receivables valued at JP¥659.0m due within 12 months. So it actually has JP¥578.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Aplix could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Aplix has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Aplix has boosted its EBIT by 90%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Aplix will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Aplix 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, Aplix actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Aplix has JP¥646.0m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 142% of that EBIT to free cash flow, bringing in JP¥133m. So we don't think Aplix'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 Aplix has 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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.

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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.