Does Maruichi Steel Tube (TSE:5463) Have A Healthy Balance Sheet?

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. Importantly, Maruichi Steel Tube Ltd. (TSE:5463) does carry debt. But is this debt a concern to shareholders?

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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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Maruichi Steel Tube's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Maruichi Steel Tube had JP¥4.53b of debt in December 2024, down from JP¥7.34b, one year before. But on the other hand it also has JP¥95.0b in cash, leading to a JP¥90.5b net cash position.

How Healthy Is Maruichi Steel Tube's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Maruichi Steel Tube had liabilities of JP¥46.4b due within 12 months and liabilities of JP¥26.7b due beyond that. Offsetting this, it had JP¥95.0b in cash and JP¥55.1b in receivables that were due within 12 months. So it can boast JP¥77.0b more liquid assets than total liabilities.

This surplus liquidity suggests that Maruichi Steel Tube's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Maruichi Steel Tube has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for Maruichi Steel Tube

It is just as well that Maruichi Steel Tube's load is not too heavy, because its EBIT was down 37% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Maruichi Steel Tube can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Maruichi Steel Tube may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Maruichi Steel Tube produced sturdy free cash flow equating to 58% 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 Maruichi Steel Tube has net cash of JP¥90.5b, as well as more liquid assets than liabilities. So we are not troubled with Maruichi Steel Tube's debt use. 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 Maruichi Steel Tube .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.