Allied Telesis Holdings K.K (TSE:6835) Has A Pretty Healthy Balance Sheet

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.' 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 note that Allied Telesis Holdings K.K. (TSE:6835) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Allied Telesis Holdings K.K

What Is Allied Telesis Holdings K.K's Debt?

As you can see below, at the end of June 2024, Allied Telesis Holdings K.K had JP¥5.44b of debt, up from JP¥3.85b a year ago. Click the image for more detail. However, it does have JP¥10.9b in cash offsetting this, leading to net cash of JP¥5.47b.

How Healthy Is Allied Telesis Holdings K.K's Balance Sheet?

The latest balance sheet data shows that Allied Telesis Holdings K.K had liabilities of JP¥21.4b due within a year, and liabilities of JP¥7.28b falling due after that. On the other hand, it had cash of JP¥10.9b and JP¥7.39b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥10.4b.

This deficit is considerable relative to its market capitalization of JP¥11.3b, so it does suggest shareholders should keep an eye on Allied Telesis Holdings K.K's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Allied Telesis Holdings K.K boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Allied Telesis Holdings K.K's EBIT dived 10%, 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 you can't view debt in total isolation; since Allied Telesis Holdings K.K 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. Allied Telesis Holdings K.K 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. Happily for any shareholders, Allied Telesis Holdings K.K actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Allied Telesis Holdings K.K's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of JP¥5.47b. The cherry on top was that in converted 180% of that EBIT to free cash flow, bringing in JP¥3.1b. So we don't have any problem with Allied Telesis Holdings K.K's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Allied Telesis Holdings K.K is showing 3 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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.