Here's Why Alps Logistics (TSE:9055) Can Manage Its Debt Responsibly

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. As with many other companies Alps Logistics Co., Ltd. (TSE:9055) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Alps Logistics

What Is Alps Logistics's Debt?

The chart below, which you can click on for greater detail, shows that Alps Logistics had JP¥7.03b in debt in December 2023; about the same as the year before. However, its balance sheet shows it holds JP¥25.4b in cash, so it actually has JP¥18.4b net cash.

How Healthy Is Alps Logistics' Balance Sheet?

We can see from the most recent balance sheet that Alps Logistics had liabilities of JP¥24.2b falling due within a year, and liabilities of JP¥12.2b due beyond that. Offsetting this, it had JP¥25.4b in cash and JP¥19.2b in receivables that were due within 12 months. So it can boast JP¥8.26b more liquid assets than total liabilities.

This short term liquidity is a sign that Alps Logistics could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Alps Logistics boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Alps Logistics's saving grace is its low debt levels, because its EBIT has tanked 26% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Alps Logistics 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Alps Logistics 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, Alps Logistics produced sturdy free cash flow equating to 74% 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 we empathize with investors who find debt concerning, you should keep in mind that Alps Logistics has net cash of JP¥18.4b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥4.0b, being 74% of its EBIT. So we don't have any problem with Alps Logistics's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Alps Logistics 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.