These 4 Measures Indicate That CHANGE HoldingsInc (TSE:3962) Is Using Debt Safely

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies CHANGE Holdings,Inc. (TSE:3962) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for CHANGE HoldingsInc

How Much Debt Does CHANGE HoldingsInc Carry?

The image below, which you can click on for greater detail, shows that at June 2024 CHANGE HoldingsInc had debt of JP¥22.1b, up from JP¥2.83b in one year. However, it does have JP¥27.7b in cash offsetting this, leading to net cash of JP¥5.66b.

How Strong Is CHANGE HoldingsInc's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CHANGE HoldingsInc had liabilities of JP¥13.6b due within 12 months and liabilities of JP¥20.3b due beyond that. Offsetting this, it had JP¥27.7b in cash and JP¥8.89b in receivables that were due within 12 months. So it can boast JP¥2.78b more liquid assets than total liabilities.

This short term liquidity is a sign that CHANGE HoldingsInc could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, CHANGE HoldingsInc boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, CHANGE HoldingsInc grew its EBIT by 58% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since CHANGE HoldingsInc 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. CHANGE HoldingsInc 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. In the last three years, CHANGE HoldingsInc's free cash flow amounted to 44% of its EBIT, less 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 CHANGE HoldingsInc has net cash of JP¥5.66b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 58% over the last year. So we don't think CHANGE HoldingsInc's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for CHANGE HoldingsInc 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.