BIPROGY (TSE:8056) Seems To Use Debt Rather Sparingly

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.' 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 note that BIPROGY Inc. (TSE:8056) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for BIPROGY

What Is BIPROGY's Net Debt?

As you can see below, BIPROGY had JP¥20.7b of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have JP¥61.0b in cash offsetting this, leading to net cash of JP¥40.2b.

How Healthy Is BIPROGY's Balance Sheet?

According to the last reported balance sheet, BIPROGY had liabilities of JP¥96.5b due within 12 months, and liabilities of JP¥32.1b due beyond 12 months. Offsetting these obligations, it had cash of JP¥61.0b as well as receivables valued at JP¥57.9b due within 12 months. So its liabilities total JP¥9.82b more than the combination of its cash and short-term receivables.

Given BIPROGY has a market capitalization of JP¥486.0b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, BIPROGY boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that BIPROGY grew its EBIT at 14% over the last year, further increasing its ability to manage debt. 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 BIPROGY 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. BIPROGY 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, BIPROGY produced sturdy free cash flow equating to 69% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about BIPROGY's liabilities, but we can be reassured by the fact it has has net cash of JP¥40.2b. And it impressed us with free cash flow of JP¥27b, being 69% of its EBIT. So is BIPROGY's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for BIPROGY you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.