Is Maruzen Showa Unyu (TSE:9068) A Risky Investment?

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.' 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. Importantly, Maruzen Showa Unyu Co., Ltd. (TSE:9068) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Maruzen Showa Unyu

What Is Maruzen Showa Unyu's Net Debt?

As you can see below, Maruzen Showa Unyu had JP¥25.8b of debt at December 2024, down from JP¥28.8b a year prior. However, its balance sheet shows it holds JP¥36.6b in cash, so it actually has JP¥10.8b net cash.

How Strong Is Maruzen Showa Unyu's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Maruzen Showa Unyu had liabilities of JP¥31.0b due within 12 months and liabilities of JP¥27.0b due beyond that. Offsetting this, it had JP¥36.6b in cash and JP¥30.3b in receivables that were due within 12 months. So it can boast JP¥8.96b more liquid assets than total liabilities.

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

Fortunately, Maruzen Showa Unyu grew its EBIT by 8.0% in the last year, making that debt load look even more manageable. 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 Maruzen Showa Unyu can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Maruzen Showa Unyu 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, Maruzen Showa Unyu produced sturdy free cash flow equating to 67% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Maruzen Showa Unyu has net cash of JP¥10.8b, as well as more liquid assets than liabilities. The cherry on top was that in converted 67% of that EBIT to free cash flow, bringing in JP¥10b. So we don't think Maruzen Showa Unyu's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Maruzen Showa Unyu , and understanding them should be part of your investment process.

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.