These 4 Measures Indicate That Asteria (TSE:3853) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Asteria Corporation (TSE:3853) does use debt in its business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Asteria

What Is Asteria's Net Debt?

The image below, which you can click on for greater detail, shows that Asteria had debt of JP¥385.0m at the end of September 2024, a reduction from JP¥528.0m over a year. But on the other hand it also has JP¥2.88b in cash, leading to a JP¥2.50b net cash position.

How Strong Is Asteria's Balance Sheet?

The latest balance sheet data shows that Asteria had liabilities of JP¥1.51b due within a year, and liabilities of JP¥453.0m falling due after that. Offsetting these obligations, it had cash of JP¥2.88b as well as receivables valued at JP¥180.0m due within 12 months. So it can boast JP¥1.10b more liquid assets than total liabilities.

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

Although Asteria made a loss at the EBIT level, last year, it was also good to see that it generated JP¥4.0b in EBIT over the last twelve months. 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 Asteria 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 company can only pay off debt with cold hard cash, not accounting profits. While Asteria 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. Looking at the most recent year, Asteria recorded free cash flow of 28% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Asteria has net cash of JP¥2.50b, as well as more liquid assets than liabilities. So we don't have any problem with Asteria's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Asteria (of which 1 is significant!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.