Is AR advanced technology (TSE:5578) A Risky Investment?

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. We can see that AR advanced technology, Inc. (TSE:5578) does use debt in its business. But the more important question is: how much risk is that debt creating?

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When Is Debt A Problem?

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. 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, 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 examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does AR advanced technology Carry?

As you can see below, at the end of February 2025, AR advanced technology had JP¥1.83b of debt, up from JP¥880.0m a year ago. Click the image for more detail. But on the other hand it also has JP¥2.09b in cash, leading to a JP¥259.0m net cash position.

A Look At AR advanced technology's Liabilities

Zooming in on the latest balance sheet data, we can see that AR advanced technology had liabilities of JP¥3.59b due within 12 months and liabilities of JP¥665.0m due beyond that. On the other hand, it had cash of JP¥2.09b and JP¥2.03b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥143.0m.

Having regard to AR advanced technology's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the JP¥7.18b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, AR advanced technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

See our latest analysis for AR advanced technology

On the other hand, AR advanced technology saw its EBIT drop by 6.2% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since AR advanced technology 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, a company can only pay off debt with cold hard cash, not accounting profits. While AR advanced technology 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. Looking at the most recent three years, AR advanced technology recorded free cash flow of 41% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about AR advanced technology's liabilities, but we can be reassured by the fact it has has net cash of JP¥259.0m. So we are not troubled with AR advanced technology's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for AR advanced technology you should be aware of, and 1 of them is a bit concerning.

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.