MaruwaLtd (TSE:5344) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that Maruwa Co.,Ltd. (TSE:5344) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out 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¥600.0m of debt in December 2023, down from JP¥1.50b, one year before. However, its balance sheet shows it holds JP¥49.9b in cash, so it actually has JP¥49.3b net cash.

How Healthy Is MaruwaLtd's Balance Sheet?

The latest balance sheet data shows that MaruwaLtd had liabilities of JP¥10.8b due within a year, and liabilities of JP¥894.0m falling due after that. On the other hand, it had cash of JP¥49.9b and JP¥15.9b worth of receivables due within a year. So it can boast JP¥54.0b more liquid assets than total liabilities.

This surplus suggests that MaruwaLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that MaruwaLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, MaruwaLtd's EBIT dived 11%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. 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 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. In the last three years, MaruwaLtd's free cash flow amounted to 36% 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¥49.3b in net cash and a decent-looking balance sheet. So we are not troubled with MaruwaLtd's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of MaruwaLtd's earnings per share history for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.