These 4 Measures Indicate That AR advanced technology (TSE:5578) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. 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 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 AR advanced technology's Debt?

The image below, which you can click on for greater detail, shows that at August 2025 AR advanced technology had debt of JP¥1.53b, up from JP¥880.0m in one year. However, its balance sheet shows it holds JP¥2.91b in cash, so it actually has JP¥1.38b net cash.

How Healthy Is AR advanced technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that AR advanced technology had liabilities of JP¥4.08b due within 12 months and liabilities of JP¥519.0m due beyond that. Offsetting this, it had JP¥2.91b in cash and JP¥1.99b in receivables that were due within 12 months. So it actually has JP¥310.0m more liquid assets than total liabilities.

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

View our latest analysis for AR advanced technology

On top of that, AR advanced technology grew its EBIT by 97% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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. AR advanced technology 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. During the last three years, AR advanced technology generated free cash flow amounting to a very robust 97% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case AR advanced technology has JP¥1.38b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 97% of that EBIT to free cash flow, bringing in JP¥870m. So we don't think AR advanced technology's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with AR advanced technology (including 2 which are concerning) .

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.