Is Internetworking and Broadband ConsultingLtd (TSE:3920) A Risky Investment?

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.' 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. We note that Internetworking and Broadband Consulting Co.,Ltd. (TSE:3920) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Internetworking and Broadband ConsultingLtd

What Is Internetworking and Broadband ConsultingLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Internetworking and Broadband ConsultingLtd had JP¥902.0m of debt in March 2024, down from JP¥1.02b, one year before. But on the other hand it also has JP¥1.61b in cash, leading to a JP¥711.0m net cash position.

How Strong Is Internetworking and Broadband ConsultingLtd's Balance Sheet?

According to the last reported balance sheet, Internetworking and Broadband ConsultingLtd had liabilities of JP¥1.22b due within 12 months, and liabilities of JP¥9.00m due beyond 12 months. Offsetting this, it had JP¥1.61b in cash and JP¥455.0m in receivables that were due within 12 months. So it actually has JP¥836.0m more liquid assets than total liabilities.

This excess liquidity suggests that Internetworking and Broadband ConsultingLtd is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Internetworking and Broadband ConsultingLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Internetworking and Broadband ConsultingLtd grew its EBIT by 147% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Internetworking and Broadband ConsultingLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Internetworking and Broadband ConsultingLtd 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, Internetworking and Broadband ConsultingLtd 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 we empathize with investors who find debt concerning, you should keep in mind that Internetworking and Broadband ConsultingLtd has net cash of JP¥711.0m, as well as more liquid assets than liabilities. The cherry on top was that in converted 223% of that EBIT to free cash flow, bringing in JP¥362m. The bottom line is that we do not find Internetworking and Broadband ConsultingLtd's debt levels at all concerning. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 5 warning signs for Internetworking and Broadband ConsultingLtd you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

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