baudroieinc (TSE:4413) Has A Rock Solid Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, baudroie,inc. (TSE:4413) does carry debt. But the real question is whether this debt is making the company risky.

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is baudroieinc's Debt?

You can click the graphic below for the historical numbers, but it shows that as of November 2024 baudroieinc had JP¥1.46b of debt, an increase on JP¥798.0m, over one year. However, it does have JP¥5.67b in cash offsetting this, leading to net cash of JP¥4.21b.

A Look At baudroieinc's Liabilities

Zooming in on the latest balance sheet data, we can see that baudroieinc had liabilities of JP¥2.78b due within 12 months and liabilities of JP¥1.33b due beyond that. Offsetting these obligations, it had cash of JP¥5.67b as well as receivables valued at JP¥1.54b due within 12 months. So it actually has JP¥3.10b more liquid assets than total liabilities.

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

Check out our latest analysis for baudroieinc

In addition to that, we're happy to report that baudroieinc has boosted its EBIT by 47%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if baudroieinc can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts .

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. baudroieinc 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 most recent two years, baudroieinc recorded free cash flow worth 68% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case baudroieinc has JP¥4.21b in net cash and a decent-looking balance sheet. And we liked the look of last year's 47% year-on-year EBIT growth. So is baudroieinc'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. For example, we've discovered 1 warning sign for baudroieinc that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.