Here's Why Japan Cash Machine (TSE:6418) Can Manage Its Debt Responsibly

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Japan Cash Machine Co., Ltd. (TSE:6418) does use debt in its business. But is this debt a concern to shareholders?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Japan Cash Machine

What Is Japan Cash Machine's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Japan Cash Machine had debt of JP¥10.8b, up from JP¥4.10b in one year. However, its balance sheet shows it holds JP¥12.6b in cash, so it actually has JP¥1.78b net cash.

How Healthy Is Japan Cash Machine's Balance Sheet?

According to the last reported balance sheet, Japan Cash Machine had liabilities of JP¥9.26b due within 12 months, and liabilities of JP¥9.78b due beyond 12 months. Offsetting this, it had JP¥12.6b in cash and JP¥6.86b in receivables that were due within 12 months. So it can boast JP¥400.0m more liquid assets than total liabilities.

Having regard to Japan Cash Machine's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the JP¥32.6b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Japan Cash Machine boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Japan Cash Machine grew its EBIT by 356% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Japan Cash Machine will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Japan Cash Machine 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. Over the last three years, Japan Cash Machine saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Japan Cash Machine has JP¥1.78b in net cash and a decent-looking balance sheet. And we liked the look of last year's 356% year-on-year EBIT growth. So we don't have any problem with Japan Cash Machine's use of debt. 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 learn about the 2 warning signs we've spotted with Japan Cash Machine (including 1 which can't be ignored) .

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