Is Canon Marketing Japan (TSE:8060) Using Too Much Debt?

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 can see that Canon Marketing Japan Inc. (TSE:8060) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, 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. 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 Canon Marketing Japan

How Much Debt Does Canon Marketing Japan Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Canon Marketing Japan had debt of JP¥3.09b, up from none in one year. However, it does have JP¥111.7b in cash offsetting this, leading to net cash of JP¥108.7b.

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¥116.7b falling due within a year, and liabilities of JP¥13.6b due beyond that. Offsetting this, it had JP¥111.7b in cash and JP¥150.4b in receivables that were due within 12 months. So it actually has JP¥131.8b more liquid assets than total liabilities.

This excess liquidity suggests that Canon Marketing Japan is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Canon Marketing Japan has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Canon Marketing Japan grew its EBIT by 2.7% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Canon Marketing Japan has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Canon Marketing Japan produced sturdy free cash flow equating to 53% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Canon Marketing Japan has JP¥108.7b in net cash and a decent-looking balance sheet. So is Canon Marketing Japan's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Canon Marketing Japan that you should be aware of before investing here.

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.

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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.