We Think Valtes HoldingsLtd (TSE:4442) Can Manage Its Debt With Ease

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Valtes Holdings Co.,Ltd. (TSE:4442) makes use of debt. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is Valtes HoldingsLtd's Net Debt?

As you can see below, at the end of June 2025, Valtes HoldingsLtd had JP¥1.78b of debt, up from JP¥968.0m a year ago. Click the image for more detail. However, it does have JP¥2.19b in cash offsetting this, leading to net cash of JP¥411.0m.

How Healthy Is Valtes HoldingsLtd's Balance Sheet?

We can see from the most recent balance sheet that Valtes HoldingsLtd had liabilities of JP¥2.47b falling due within a year, and liabilities of JP¥663.0m due beyond that. On the other hand, it had cash of JP¥2.19b and JP¥1.27b worth of receivables due within a year. So it actually has JP¥328.0m more liquid assets than total liabilities.

This surplus suggests that Valtes HoldingsLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Valtes HoldingsLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for Valtes HoldingsLtd

In addition to that, we're happy to report that Valtes HoldingsLtd has boosted its EBIT by 39%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Valtes HoldingsLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Valtes HoldingsLtd 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, Valtes HoldingsLtd's free cash flow amounted to 49% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Valtes HoldingsLtd has net cash of JP¥411.0m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 39% over the last year. So is Valtes HoldingsLtd's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Valtes HoldingsLtd you should be aware of.

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.

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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.