Daiwabo Holdings (TSE:3107) Has A Rock Solid Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Daiwabo Holdings Co., Ltd. (TSE:3107) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Daiwabo Holdings

What Is Daiwabo Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Daiwabo Holdings had debt of JP¥20.9b at the end of March 2024, a reduction from JP¥26.1b over a year. But it also has JP¥69.4b in cash to offset that, meaning it has JP¥48.5b net cash.

How Strong Is Daiwabo Holdings' Balance Sheet?

We can see from the most recent balance sheet that Daiwabo Holdings had liabilities of JP¥239.7b falling due within a year, and liabilities of JP¥23.4b due beyond that. Offsetting these obligations, it had cash of JP¥69.4b as well as receivables valued at JP¥257.0b due within 12 months. So it actually has JP¥63.3b more liquid assets than total liabilities.

This surplus suggests that Daiwabo Holdings is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Daiwabo Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Daiwabo Holdings grew its EBIT at 11% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Daiwabo Holdings 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Daiwabo Holdings 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. Over the most recent three years, Daiwabo Holdings recorded free cash flow worth 74% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Daiwabo Holdings has net cash of JP¥48.5b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥22b, being 74% of its EBIT. So is Daiwabo Holdings's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Daiwabo Holdings has 3 warning signs we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com