These 4 Measures Indicate That AMIYA (TSE:4258) Is Using Debt Safely

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 note that AMIYA Corporation (TSE:4258) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is AMIYA's Debt?

As you can see below, at the end of December 2024, AMIYA had JP¥1.07b of debt, up from JP¥398.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds JP¥3.58b in cash, so it actually has JP¥2.51b net cash.

How Healthy Is AMIYA's Balance Sheet?

According to the last reported balance sheet, AMIYA had liabilities of JP¥2.96b due within 12 months, and liabilities of JP¥323.0m due beyond 12 months. On the other hand, it had cash of JP¥3.58b and JP¥414.0m worth of receivables due within a year. So it can boast JP¥709.0m more liquid assets than total liabilities.

This short term liquidity is a sign that AMIYA could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that AMIYA has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for AMIYA

In addition to that, we're happy to report that AMIYA has boosted its EBIT by 45%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is AMIYA'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. AMIYA 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 two years, AMIYA actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that AMIYA has net cash of JP¥2.51b, as well as more liquid assets than liabilities. The cherry on top was that in converted 162% of that EBIT to free cash flow, bringing in JP¥1.1b. So is AMIYA's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with AMIYA .

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.