These 4 Measures Indicate That Pegasus (TSE:6262) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Pegasus Co., Ltd. (TSE:6262) does use debt in its business. But the real question is whether this debt is making the company risky.

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Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is Pegasus's Net Debt?

The image below, which you can click on for greater detail, shows that Pegasus had debt of JP¥6.16b at the end of December 2024, a reduction from JP¥6.50b over a year. But it also has JP¥9.02b in cash to offset that, meaning it has JP¥2.86b net cash.

A Look At Pegasus' Liabilities

We can see from the most recent balance sheet that Pegasus had liabilities of JP¥6.83b falling due within a year, and liabilities of JP¥4.73b due beyond that. Offsetting these obligations, it had cash of JP¥9.02b as well as receivables valued at JP¥6.78b due within 12 months. So it actually has JP¥4.24b more liquid assets than total liabilities.

This surplus liquidity suggests that Pegasus' 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 Pegasus has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for Pegasus

Better yet, Pegasus grew its EBIT by 165% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Pegasus's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Pegasus 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. Over the last three years, Pegasus recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Pegasus has net cash of JP¥2.86b, as well as more liquid assets than liabilities. And we liked the look of last year's 165% year-on-year EBIT growth. So is Pegasus's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Pegasus that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.