Dexerials (TSE:4980) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Dexerials Corporation (TSE:4980) makes use of debt. But should shareholders be worried about its use of debt?

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What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is Dexerials's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Dexerials had JP¥19.3b of debt in March 2025, down from JP¥21.7b, one year before. But it also has JP¥35.0b in cash to offset that, meaning it has JP¥15.7b net cash.

How Strong Is Dexerials' Balance Sheet?

We can see from the most recent balance sheet that Dexerials had liabilities of JP¥39.3b falling due within a year, and liabilities of JP¥16.6b due beyond that. Offsetting this, it had JP¥35.0b in cash and JP¥18.0b in receivables that were due within 12 months. So it has liabilities totalling JP¥2.95b more than its cash and near-term receivables, combined.

This state of affairs indicates that Dexerials' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the JP¥366.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Dexerials also has more cash than debt, so we're pretty confident it can manage its debt safely.

Check out our latest analysis for Dexerials

And we also note warmly that Dexerials grew its EBIT by 18% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Dexerials's ability to maintain a healthy balance sheet going forward. 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. 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 49% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Dexerials's liabilities, but we can be reassured by the fact it has has net cash of JP¥15.7b. And we liked the look of last year's 18% year-on-year EBIT growth. So is Dexerials'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. For example, we've discovered 1 warning sign for Dexerials that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.