We Think Daiwabo Holdings (TSE:3107) Can Manage Its Debt With Ease

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Daiwabo Holdings Co., Ltd. (TSE:3107) makes use of debt. But is this debt a concern to shareholders?

We check all companies for important risks. See what we found for Daiwabo Holdings in our free report.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Daiwabo Holdings Carry?

As you can see below, Daiwabo Holdings had JP¥20.6b of debt at December 2024, down from JP¥25.0b a year prior. But it also has JP¥60.4b in cash to offset that, meaning it has JP¥39.9b 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¥259.3b falling due within a year, and liabilities of JP¥23.3b due beyond that. Offsetting these obligations, it had cash of JP¥60.4b as well as receivables valued at JP¥270.3b due within 12 months. So it actually has JP¥48.1b more liquid assets than total liabilities.

This excess liquidity suggests that Daiwabo Holdings is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face 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!

View our latest analysis for Daiwabo Holdings

And we also note warmly that Daiwabo Holdings grew its EBIT by 17% last year, making its debt load easier to handle. 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 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, a company can only pay off debt with cold hard cash, not accounting profits. 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. During the last three years, Daiwabo Holdings produced sturdy free cash flow equating to 56% of its EBIT, about what we'd expect. 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¥39.9b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 17% over the last year. So we don't think Daiwabo Holdings's use of debt is risky. Given Daiwabo Holdings has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.