We Think Internet Initiative Japan (TSE:3774) Can Manage Its Debt With Ease

Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ 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, Internet Initiative Japan Inc. (TSE:3774) does carry debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company’s use of debt, we first look at cash and debt together.

View our latest analysis for Internet Initiative Japan

What Is Internet Initiative Japan’s Net Debt?

As you can see below, at the end of December 2023, Internet Initiative Japan had JP¥30.2b of debt, up from JP¥20.4b a year ago. Click the image for more detail. However, its balance sheet shows it holds JP¥42.9b in cash, so it actually has JP¥12.8b net cash.

How Strong Is Internet Initiative Japan’s Balance Sheet?

The latest balance sheet data shows that Internet Initiative Japan had liabilities of JP¥96.9b due within a year, and liabilities of JP¥47.4b falling due after that. On the other hand, it had cash of JP¥42.9b and JP¥44.0b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥57.3b.

Of course, Internet Initiative Japan has a market capitalization of JP¥475.8b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Internet Initiative Japan also has more cash than debt, so we’re pretty confident it can manage its debt safely.

The good news is that Internet Initiative Japan has increased its EBIT by 9.0% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Internet Initiative Japan’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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Internet Initiative Japan 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. Over the last three years, Internet Initiative Japan recorded free cash flow worth a fulsome 98% of its EBIT, which is stronger than we’d usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While Internet Initiative Japan does have more liabilities than liquid assets, it also has net cash of JP¥12.8b. And it impressed us with free cash flow of JP¥22b, being 98% of its EBIT. So we don’t think Internet Initiative Japan’s use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you’ve also come to that realization, you’re in luck, because today you can view this interactive graph of Internet Initiative Japan’s earnings per share history for free.

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.