Dexerials (TSE:4980) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Dexerials Corporation (TSE:4980) makes use of debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Dexerials

How Much Debt Does Dexerials Carry?

The chart below, which you can click on for greater detail, shows that Dexerials had JP¥22.2b in debt in December 2023; about the same as the year before. But on the other hand it also has JP¥34.0b in cash, leading to a JP¥11.8b net cash position.

How Strong Is Dexerials' Balance Sheet?

The latest balance sheet data shows that Dexerials had liabilities of JP¥27.9b due within a year, and liabilities of JP¥22.2b falling due after that. Offsetting this, it had JP¥34.0b in cash and JP¥20.9b in receivables that were due within 12 months. So it actually has JP¥4.86b more liquid assets than total liabilities.

Having regard to Dexerials' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the JP¥338.8b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Dexerials boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Dexerials's EBIT dived 16%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Dexerials 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. While Dexerials 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. In the last three years, Dexerials's free cash flow amounted to 44% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Dexerials has JP¥11.8b in net cash and a decent-looking balance sheet. So we are not troubled with Dexerials's debt use. 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 2 warning signs for Dexerials 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.