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Howard Marks put it well when he said, “The possibility of permanent loss is the risk that worries me… and that worries every practical investor I know.” It is only natural to consider a company’s balance sheet when examining how risky it is, because when a company collapses, debt is often involved. We can see that USS Co., Ltd. (TSE:4732) does indeed use debt in its business. But is this debt a cause for concern for shareholders?

When is debt dangerous?

Debt helps a company until it struggles to pay it back with either fresh capital or free cash flow. If things go really bad, lenders can take control of the company. While this doesn’t happen too often, we often see indebted companies permanently dilute their shareholder base because lenders force them to raise capital at a distressed price. By replacing dilution, however, debt can be an extremely good tool for companies that need capital to invest in high-return growth. When we think about a company’s use of debt, we first look at cash and debt together.

Check out our latest analysis for USS

How much is the USS’s debt?

As you can see below, USS had JP¥2.59 billion in debt at the end of March 2024, up from JP¥2.35 billion a year ago. Click on the image for more details. However, to offset this, USS also has JP¥112.0 billion in cash, meaning the company has net cash of JP¥109.4 billion.

A look at USS’s liabilities

According to the latest balance sheet data, USS had JP¥63.1 billion in liabilities due within one year and JP¥9.41 billion in accounts payable due after that. On the other hand, the company had JP¥112.0 billion in cash and JP¥27.1 billion in accounts receivable due within one year. Thus, the company has JP¥66.6 billion more cash than in total Liabilities.

This short-term liquidity is a sign that USS could probably easily pay off its debts, as its balance sheet is far from overstretched. In short, USS has net cash flow, so it’s fair to say that the company does not have a high debt burden!

And we also note positively that USS was able to grow its EBIT by 12% over the last year, making its debt load more manageable. There’s no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will determine whether USS can strengthen its balance sheet over time. So if you’re focused on the future, you might want to look at free Report with analysts’ profit forecasts.

After all, a company can only pay off debt with cold hard cash, not accounting profits. While USS has net cash on the balance sheet, it’s still interesting to see how well the company converts its earnings before interest and tax (EBIT) to free cash flow, as this affects both its need for debt and its ability to manage it. Over the past three years, USS has generated free cash flow equal to a very solid 83% of its EBIT, more than we would have expected. This leaves the company well positioned to pay down debt if it so desires.

Summarize

While it always makes sense to examine a company’s debt, in this case USS has JP¥109.4bn in net cash and a decent looking balance sheet. The icing on the cake was that 83% of that EBIT was converted to free cash flow, bringing in JP¥44bn. So does USS’s debt pose a risk? It doesn’t seem so to us. Over time, share prices tend to follow earnings per share, so if you’re interested in USS, click here to see an interactive graph of its earnings per share history.

Of course, if you’re one of those investors who prefers to buy stocks without the burden of debt, you should discover our exclusive list of net cash growth stocks today.

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This Simply Wall St article is of a general nature. We comment solely on historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.

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