These 4 Measures Indicate That Dexerials (TSE:4980) Is Using Debt Reasonably Well

Warren Buffett famously said, '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. Importantly, Dexerials Corporation (TSE:4980) does carry 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, 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Dexerials

How Much Debt Does Dexerials Carry?

As you can see below, at the end of March 2024, Dexerials had JP¥21.7b of debt, up from JP¥19.7b a year ago. Click the image for more detail. But it also has JP¥37.4b in cash to offset that, meaning it has JP¥15.7b net cash.

A Look At Dexerials' Liabilities

Zooming in on the latest balance sheet data, we can see that Dexerials had liabilities of JP¥31.0b due within 12 months and liabilities of JP¥22.1b due beyond that. Offsetting this, it had JP¥37.4b in cash and JP¥18.0b in receivables that were due within 12 months. So it actually has JP¥2.36b more liquid assets than total liabilities.

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 it's very unlikely that the JP¥411.2b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Dexerials has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Dexerials has increased its EBIT by 3.2% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. During the last three years, Dexerials produced sturdy free cash flow equating to 51% 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 Dexerials has net cash of JP¥15.7b, as well as more liquid assets than liabilities. So we don't have any problem with Dexerials's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Dexerials has 2 warning signs we think you should be aware of.

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.

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