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. We can see that Edia Co., Ltd. (TSE:3935) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Edia
How Much Debt Does Edia Carry?
As you can see below, at the end of February 2024, Edia had JPĀ„671.0m of debt, up from JPĀ„216.0m a year ago. Click the image for more detail. But it also has JPĀ„1.42b in cash to offset that, meaning it has JPĀ„744.0m net cash.
How Healthy Is Edia's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Edia had liabilities of JPĀ„875.0m due within 12 months and liabilities of JPĀ„385.0m due beyond that. Offsetting this, it had JPĀ„1.42b in cash and JPĀ„554.0m in receivables that were due within 12 months. So it can boast JPĀ„709.0m more liquid assets than total liabilities.
This surplus suggests that Edia is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Edia boasts net cash, so it's fair to say it does not have a heavy debt load!
Fortunately, Edia grew its EBIT by 5.2% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Edia's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Edia may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Edia recorded free cash flow worth a fulsome 89% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.
Summing Up
While it is always sensible to investigate a company's debt, in this case Edia has JPĀ„744.0m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JPĀ„206m, being 89% of its EBIT. So is Edia's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Edia you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.
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About TSE:3935
Edia
Engages in the intellectual property (IP) and publishing businesses in Japan, North America, Asia, and internationally.
Flawless balance sheet and good value.
