Is Canon Marketing Japan (TSE:8060) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Canon Marketing Japan Inc. (TSE:8060) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Canon Marketing Japan

What Is Canon Marketing Japan's Net Debt?

As you can see below, at the end of March 2024, Canon Marketing Japan had JP¥3.17b of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has JP¥99.4b in cash, leading to a JP¥96.2b net cash position.

How Healthy Is Canon Marketing Japan's Balance Sheet?

We can see from the most recent balance sheet that Canon Marketing Japan had liabilities of JP¥114.8b falling due within a year, and liabilities of JP¥12.9b due beyond that. Offsetting these obligations, it had cash of JP¥99.4b as well as receivables valued at JP¥240.8b due within 12 months. So it actually has JP¥212.6b more liquid assets than total liabilities.

This luscious liquidity implies that Canon Marketing Japan's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Canon Marketing Japan boasts net cash, so it's fair to say it does not have a heavy debt load!

Canon Marketing Japan's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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 Canon Marketing Japan 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Canon Marketing Japan 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, Canon Marketing Japan recorded free cash flow of 37% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Canon Marketing Japan has net cash of JP¥96.2b, as well as more liquid assets than liabilities. So is Canon Marketing Japan's debt a risk? It doesn't seem so to us. 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. We've identified 1 warning sign with Canon Marketing Japan , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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