We Think AZ-COM MARUWA Holdings (TSE:9090) 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that AZ-COM MARUWA Holdings Inc. (TSE:9090) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for AZ-COM MARUWA Holdings

What Is AZ-COM MARUWA Holdings's Net Debt?

As you can see below, AZ-COM MARUWA Holdings had JP¥40.7b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has JP¥46.2b in cash, leading to a JP¥5.43b net cash position.

How Strong Is AZ-COM MARUWA Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that AZ-COM MARUWA Holdings had liabilities of JP¥32.6b due within 12 months and liabilities of JP¥44.4b due beyond that. Offsetting these obligations, it had cash of JP¥46.2b as well as receivables valued at JP¥22.9b due within 12 months. So it has liabilities totalling JP¥8.03b more than its cash and near-term receivables, combined.

Given AZ-COM MARUWA Holdings has a market capitalization of JP¥155.3b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, AZ-COM MARUWA Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, AZ-COM MARUWA Holdings grew its EBIT by 22% in the last year, and that should make it easier to pay down debt, going forward. 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 AZ-COM MARUWA Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While AZ-COM MARUWA Holdings 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. Looking at the most recent three years, AZ-COM MARUWA Holdings recorded free cash flow of 38% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that AZ-COM MARUWA Holdings has JP¥5.43b in net cash. And we liked the look of last year's 22% year-on-year EBIT growth. So we don't think AZ-COM MARUWA Holdings's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with AZ-COM MARUWA Holdings .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

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