Is Maruwn (TSE:9067) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Maruwn Corporation (TSE:9067) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Maruwn

What Is Maruwn's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Maruwn had JP¥1.37b of debt in March 2024, down from JP¥2.51b, one year before. However, its balance sheet shows it holds JP¥1.97b in cash, so it actually has JP¥604.0m net cash.

How Healthy Is Maruwn's Balance Sheet?

We can see from the most recent balance sheet that Maruwn had liabilities of JP¥6.95b falling due within a year, and liabilities of JP¥4.93b due beyond that. Offsetting this, it had JP¥1.97b in cash and JP¥5.90b in receivables that were due within 12 months. So its liabilities total JP¥4.01b more than the combination of its cash and short-term receivables.

Maruwn has a market capitalization of JP¥15.4b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Maruwn also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Maruwn grew its EBIT by 16% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Maruwn's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Maruwn 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. Happily for any shareholders, Maruwn actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Maruwn'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¥604.0m. And it impressed us with free cash flow of JP¥985m, being 225% of its EBIT. So is Maruwn's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 3 warning signs for Maruwn you should be aware of, and 2 of them can't be ignored.

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.