Does USEN-NEXT HOLDINGSLtd (TSE:9418) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies USEN-NEXT HOLDINGS Co.,Ltd. (TSE:9418) makes use of debt. But the more important question is: how much risk is that debt creating?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 USEN-NEXT HOLDINGSLtd

What Is USEN-NEXT HOLDINGSLtd's Net Debt?

As you can see below, USEN-NEXT HOLDINGSLtd had JP¥63.2b of debt at November 2023, down from JP¥68.7b a year prior. However, it does have JP¥52.5b in cash offsetting this, leading to net debt of about JP¥10.8b.

A Look At USEN-NEXT HOLDINGSLtd's Liabilities

We can see from the most recent balance sheet that USEN-NEXT HOLDINGSLtd had liabilities of JP¥55.6b falling due within a year, and liabilities of JP¥66.4b due beyond that. On the other hand, it had cash of JP¥52.5b and JP¥30.2b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥39.4b.

Of course, USEN-NEXT HOLDINGSLtd has a market capitalization of JP¥264.9b, so these liabilities are probably manageable. 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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

USEN-NEXT HOLDINGSLtd has a low net debt to EBITDA ratio of only 0.31. And its EBIT covers its interest expense a whopping 43.1 times over. So we're pretty relaxed about its super-conservative use of debt. On top of that, USEN-NEXT HOLDINGSLtd grew its EBIT by 42% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine USEN-NEXT HOLDINGSLtd's ability to maintain a healthy balance sheet going forward. 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. 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, USEN-NEXT HOLDINGSLtd's free cash flow amounted to 35% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

USEN-NEXT HOLDINGSLtd's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But, on a more sombre note, we are a little concerned by its conversion of EBIT to free cash flow. Zooming out, USEN-NEXT HOLDINGSLtd seems to use debt quite reasonably; and that gets the nod from us. After all, sensible leverage can boost returns on equity. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for USEN-NEXT HOLDINGSLtd that you should be aware of.

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.

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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.