We Think Dexerials (TSE:4980) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Dexerials Corporation (TSE:4980) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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, Dexerials had JP¥21.1b of debt at December 2024, down from JP¥22.2b a year prior. However, its balance sheet shows it holds JP¥40.1b in cash, so it actually has JP¥19.0b net cash.

How Healthy Is Dexerials' Balance Sheet?

We can see from the most recent balance sheet that Dexerials had liabilities of JP¥47.5b falling due within a year, and liabilities of JP¥16.8b due beyond that. On the other hand, it had cash of JP¥40.1b and JP¥14.6b worth of receivables due within a year. So it has liabilities totalling JP¥9.54b more than its cash and near-term receivables, combined.

Of course, Dexerials has a market capitalization of JP¥346.8b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

In addition to that, we're happy to report that Dexerials has boosted its EBIT by 35%, thus reducing the spectre of future debt repayments. 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 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Dexerials 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, Dexerials 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

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¥19.0b. And it impressed us with its EBIT growth of 35% over the last year. So we don't think Dexerials's use of debt is risky. 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, we've discovered 1 warning sign for Dexerials that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.