MaruwaLtd (TSE:5344) Could Easily Take On More Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Maruwa Co.,Ltd. (TSE:5344) does carry debt. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

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 December 2024, down from JP¥600.0m, one year before. However, it does have JP¥65.9b in cash offsetting this, leading to net cash of JP¥65.5b.

A Look At MaruwaLtd's Liabilities

We can see from the most recent balance sheet that MaruwaLtd had liabilities of JP¥12.8b falling due within a year, and liabilities of JP¥507.0m due beyond that. On the other hand, it had cash of JP¥65.9b and JP¥16.9b worth of receivables due within a year. So it actually has JP¥69.5b more liquid assets than total liabilities.

It's good to see that MaruwaLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that MaruwaLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for MaruwaLtd

On top of that, MaruwaLtd grew its EBIT by 36% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine MaruwaLtd'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Looking at the most recent three years, MaruwaLtd recorded free cash flow of 41% 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¥65.5b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 36% over the last year. So we don't think MaruwaLtd's use of debt is risky. 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. We've identified 1 warning sign with MaruwaLtd , and understanding them should be part of your investment process.

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.