These 4 Measures Indicate That Earth InfinityLtd (TSE:7692) Is Using Debt Safely

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.' 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. As with many other companies Earth Infinity Co.Ltd. (TSE:7692) makes use of debt. But the real question is whether this debt is making the company risky.

Our free stock report includes 3 warning signs investors should be aware of before investing in Earth InfinityLtd. Read for free now.

When Is Debt Dangerous?

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Earth InfinityLtd's Debt?

As you can see below, at the end of January 2025, Earth InfinityLtd had JP¥1.17b of debt, up from JP¥959.0m a year ago. Click the image for more detail. However, it does have JP¥633.0m in cash offsetting this, leading to net debt of about JP¥533.0m.

A Look At Earth InfinityLtd's Liabilities

We can see from the most recent balance sheet that Earth InfinityLtd had liabilities of JP¥1.48b falling due within a year, and liabilities of JP¥510.0m due beyond that. Offsetting these obligations, it had cash of JP¥633.0m as well as receivables valued at JP¥1.49b due within 12 months. So it actually has JP¥137.0m more liquid assets than total liabilities.

This state of affairs indicates that Earth InfinityLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the JP¥10.6b company is struggling for cash, we still think it's worth monitoring its balance sheet.

View our latest analysis for Earth InfinityLtd

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Earth InfinityLtd's net debt is only 0.88 times its EBITDA. And its EBIT easily covers its interest expense, being 81.7 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Better yet, Earth InfinityLtd grew its EBIT by 225% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Earth InfinityLtd will need earnings to service that debt. 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. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Looking at the most recent three years, Earth InfinityLtd recorded free cash flow of 48% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

Earth InfinityLtd's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And that's just the beginning of the good news since its EBIT growth rate is also very heartening. We would also note that Electric Utilities industry companies like Earth InfinityLtd commonly do use debt without problems. Considering this range of factors, it seems to us that Earth InfinityLtd is quite prudent with its debt, and the risks seem well managed. So we're not worried about the use of a little leverage on the balance sheet. 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. We've identified 3 warning signs with Earth InfinityLtd (at least 1 which is significant) , and understanding them should be part of your investment process.

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.