Does WingArc1st (TSE:4432) Have A Healthy Balance Sheet?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, WingArc1st Inc. (TSE:4432) does carry debt. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

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. 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 think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does WingArc1st Carry?

As you can see below, WingArc1st had JP¥8.56b of debt at February 2025, down from JP¥9.94b a year prior. But on the other hand it also has JP¥14.7b in cash, leading to a JP¥6.16b net cash position.

How Healthy Is WingArc1st's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that WingArc1st had liabilities of JP¥14.8b due within 12 months and liabilities of JP¥11.8b due beyond that. Offsetting these obligations, it had cash of JP¥14.7b as well as receivables valued at JP¥2.45b due within 12 months. So its liabilities total JP¥9.43b more than the combination of its cash and short-term receivables.

Of course, WingArc1st has a market capitalization of JP¥127.7b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, WingArc1st also has more cash than debt, so we're pretty confident it can manage its debt safely.

Check out our latest analysis for WingArc1st

Also good is that WingArc1st grew its EBIT at 12% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine WingArc1st's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While WingArc1st 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. Over the last three years, WingArc1st recorded free cash flow worth a fulsome 95% 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 look at a company's total liabilities, it is very reassuring that WingArc1st has JP¥6.16b in net cash. The cherry on top was that in converted 95% of that EBIT to free cash flow, bringing in JP¥7.4b. So we don't think WingArc1st's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in WingArc1st, you may well want to click here to check an interactive graph of its earnings per share history.

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.