We Think TechMatrix (TSE:3762) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, TechMatrix Corporation (TSE:3762) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for TechMatrix

What Is TechMatrix's Debt?

The image below, which you can click on for greater detail, shows that TechMatrix had debt of JP¥620.0m at the end of June 2024, a reduction from JP¥820.0m over a year. However, its balance sheet shows it holds JP¥26.4b in cash, so it actually has JP¥25.7b net cash.

How Strong Is TechMatrix's Balance Sheet?

According to the last reported balance sheet, TechMatrix had liabilities of JP¥55.7b due within 12 months, and liabilities of JP¥7.00b due beyond 12 months. Offsetting these obligations, it had cash of JP¥26.4b as well as receivables valued at JP¥4.45b due within 12 months. So its liabilities total JP¥31.9b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because TechMatrix is worth JP¥95.1b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, TechMatrix also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that TechMatrix grew its EBIT at 19% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if TechMatrix 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While TechMatrix 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, TechMatrix 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 TechMatrix does have more liabilities than liquid assets, it also has net cash of JP¥25.7b. And it impressed us with free cash flow of JP¥8.0b, being 116% of its EBIT. So we don't think TechMatrix's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of TechMatrix's earnings per share history for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.