Is Internet Initiative Japan (TSE:3774) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Internet Initiative Japan Inc. (TSE:3774) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 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 Internet Initiative Japan

What Is Internet Initiative Japan's Net Debt?

As you can see below, at the end of December 2024, Internet Initiative Japan had JP¥33.6b of debt, up from JP¥30.2b a year ago. Click the image for more detail. However, it does have JP¥34.8b in cash offsetting this, leading to net cash of JP¥1.18b.

How Healthy Is Internet Initiative Japan's Balance Sheet?

We can see from the most recent balance sheet that Internet Initiative Japan had liabilities of JP¥92.8b falling due within a year, and liabilities of JP¥76.9b due beyond that. Offsetting this, it had JP¥34.8b in cash and JP¥47.1b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥87.9b.

Since publicly traded Internet Initiative Japan shares are worth a total of JP¥449.0b, 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. Despite its noteworthy liabilities, Internet Initiative Japan boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Internet Initiative Japan has increased its EBIT by 3.5% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Internet Initiative Japan'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, a company can only pay off debt with cold hard cash, not accounting profits. While Internet Initiative 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, Internet Initiative Japan produced sturdy free cash flow equating to 73% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While Internet Initiative Japan does have more liabilities than liquid assets, it also has net cash of JP¥1.18b. The cherry on top was that in converted 73% of that EBIT to free cash flow, bringing in JP¥16b. So is Internet Initiative Japan's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Internet Initiative Japan's earnings per share history for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.