A&D HOLON Holdings Company (TSE:7745) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that A&D HOLON Holdings Company, Limited (TSE:7745) does use debt in its business. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for A&D HOLON Holdings Company

How Much Debt Does A&D HOLON Holdings Company Carry?

As you can see below, A&D HOLON Holdings Company had JP¥16.8b of debt at March 2024, down from JP¥20.6b a year prior. However, it does have JP¥14.6b in cash offsetting this, leading to net debt of about JP¥2.15b.

How Strong Is A&D HOLON Holdings Company's Balance Sheet?

We can see from the most recent balance sheet that A&D HOLON Holdings Company had liabilities of JP¥29.9b falling due within a year, and liabilities of JP¥4.33b due beyond that. On the other hand, it had cash of JP¥14.6b and JP¥17.8b worth of receivables due within a year. So it has liabilities totalling JP¥1.83b more than its cash and near-term receivables, combined.

Since publicly traded A&D HOLON Holdings Company shares are worth a total of JP¥80.4b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

A&D HOLON Holdings Company has a low net debt to EBITDA ratio of only 0.22. And its EBIT covers its interest expense a whopping 62.6 times over. So we're pretty relaxed about its super-conservative use of debt. The good news is that A&D HOLON Holdings Company has increased its EBIT by 6.4% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine A&D HOLON Holdings Company's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. In the last three years, A&D HOLON Holdings Company's free cash flow amounted to 33% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

The good news is that A&D HOLON Holdings Company's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. But, on a more sombre note, we are a little concerned by its conversion of EBIT to free cash flow. Taking all this data into account, it seems to us that A&D HOLON Holdings Company takes a pretty sensible approach to debt. While that brings some risk, it can also enhance returns for shareholders. 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. Case in point: We've spotted 1 warning sign for A&D HOLON Holdings Company you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

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