Is MaruwaLtd (TSE:5344) A Risky Investment?

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. We note that Maruwa Co.,Ltd. (TSE:5344) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for MaruwaLtd

What Is MaruwaLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that MaruwaLtd had JP¥400.0m of debt in June 2024, down from JP¥600.0m, one year before. However, it does have JP¥57.3b in cash offsetting this, leading to net cash of JP¥56.9b.

How Strong Is MaruwaLtd's Balance Sheet?

The latest balance sheet data shows that MaruwaLtd had liabilities of JP¥10.4b due within a year, and liabilities of JP¥471.0m falling due after that. Offsetting these obligations, it had cash of JP¥57.3b as well as receivables valued at JP¥16.1b due within 12 months. So it actually has JP¥62.5b more liquid assets than total liabilities.

This short term liquidity is a sign that MaruwaLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that MaruwaLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that MaruwaLtd grew its EBIT by 16% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if MaruwaLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While MaruwaLtd 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. Looking at the most recent three years, MaruwaLtd recorded free cash flow of 36% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that MaruwaLtd has net cash of JP¥56.9b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 16% over the last year. So is MaruwaLtd'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. To that end, you should be aware of the 1 warning sign we've spotted with MaruwaLtd .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.