We Think Internet Initiative Japan (TSE:3774) Can Stay On Top Of Its 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Internet Initiative Japan Inc. (TSE:3774) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Internet Initiative Japan Carry?

The image below, which you can click on for greater detail, shows that at September 2025 Internet Initiative Japan had debt of JP¥35.6b, up from JP¥28.4b in one year. However, its balance sheet shows it holds JP¥37.3b in cash, so it actually has JP¥1.71b net cash.

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¥124.3b falling due within a year, and liabilities of JP¥55.2b due beyond that. Offsetting this, it had JP¥37.3b in cash and JP¥51.6b in receivables that were due within 12 months. So it has liabilities totalling JP¥90.6b more than its cash and near-term receivables, combined.

Given Internet Initiative Japan has a market capitalization of JP¥494.4b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Internet Initiative Japan also has more cash than debt, so we're pretty confident it can manage its debt safely.

Check out our latest analysis for Internet Initiative Japan

Also good is that Internet Initiative Japan grew its EBIT at 17% over the last year, further increasing its ability to manage 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 Internet Initiative Japan can strengthen its balance sheet over time. 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. Internet Initiative 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. During the last three years, Internet Initiative Japan produced sturdy free cash flow equating to 64% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

Although Internet Initiative Japan'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¥1.71b. And we liked the look of last year's 17% year-on-year EBIT growth. 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.

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.

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.