Is MaruwaLtd (TSE:5344) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Maruwa Co.,Ltd. (TSE:5344) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for MaruwaLtd

How Much Debt Does MaruwaLtd Carry?

The image below, which you can click on for greater detail, shows that MaruwaLtd had debt of JP¥400.0m at the end of March 2024, a reduction from JP¥733.0m over a year. However, it does have JP¥55.3b in cash offsetting this, leading to net cash of JP¥54.9b.

A Look At MaruwaLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that MaruwaLtd had liabilities of JP¥12.8b due within 12 months and liabilities of JP¥491.0m due beyond that. On the other hand, it had cash of JP¥55.3b and JP¥15.9b worth of receivables due within a year. So it can boast JP¥57.9b 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.

MaruwaLtd's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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 MaruwaLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. MaruwaLtd 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. In the last three years, MaruwaLtd's free cash flow amounted to 41% 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 MaruwaLtd has JP¥54.9b in net cash and a decent-looking balance sheet. So we don't have any problem with MaruwaLtd's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with MaruwaLtd , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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