Is CHANGE HoldingsInc (TSE:3962) Using Too Much Debt?

Warren Buffett famously said, '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 CHANGE Holdings,Inc. (TSE:3962) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 CHANGE HoldingsInc

What Is CHANGE HoldingsInc's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 CHANGE HoldingsInc had JP¥21.1b of debt, an increase on JP¥2.83b, over one year. But it also has JP¥25.9b in cash to offset that, meaning it has JP¥4.76b net cash.

A Look At CHANGE HoldingsInc's Liabilities

We can see from the most recent balance sheet that CHANGE HoldingsInc had liabilities of JP¥17.0b falling due within a year, and liabilities of JP¥22.8b due beyond that. Offsetting these obligations, it had cash of JP¥25.9b as well as receivables valued at JP¥13.3b due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that CHANGE HoldingsInc's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the JP¥91.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, CHANGE HoldingsInc boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for CHANGE HoldingsInc if management cannot prevent a repeat of the 21% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is CHANGE HoldingsInc'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While CHANGE HoldingsInc 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. In the last three years, CHANGE HoldingsInc's free cash flow amounted to 36% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about CHANGE HoldingsInc's liabilities, but we can be reassured by the fact it has has net cash of JP¥4.76b. So we are not troubled with CHANGE HoldingsInc's debt use. 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. To that end, you should learn about the 2 warning signs we've spotted with CHANGE HoldingsInc (including 1 which is potentially serious) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.