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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Internetworking and Broadband Consulting Co.,Ltd. (TSE:3920) makes use of debt. But the real question is whether this debt is making the company risky.

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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. If things get really bad, the lenders can take control of the business. 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, 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 think about a company's use of debt, we first look at cash and debt together.

What Is Internetworking and Broadband ConsultingLtd's Net Debt?

As you can see below, Internetworking and Broadband ConsultingLtd had JP¥800.0m of debt at March 2025, down from JP¥902.0m a year prior. But on the other hand it also has JP¥2.11b in cash, leading to a JP¥1.31b net cash position.

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

We can see from the most recent balance sheet that Internetworking and Broadband ConsultingLtd had liabilities of JP¥1.23b falling due within a year, and liabilities of JP¥1.02m due beyond that. Offsetting these obligations, it had cash of JP¥2.11b as well as receivables valued at JP¥510.5m due within 12 months. So it actually has JP¥1.39b more liquid assets than total liabilities.

It's good to see that Internetworking and Broadband ConsultingLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Internetworking and Broadband ConsultingLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Internetworking and Broadband ConsultingLtd

Better yet, Internetworking and Broadband ConsultingLtd grew its EBIT by 102% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Internetworking and Broadband ConsultingLtd has JP¥1.31b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥425m, being 142% of its EBIT. When it comes to Internetworking and Broadband ConsultingLtd's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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 2 warning signs for Internetworking and Broadband ConsultingLtd you should be aware of, and 1 of them is significant.

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.