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.' 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 DEPPON LOGISTICS Co., LTD. (SHSE:603056) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is DEPPON LOGISTICS's Net Debt?

You can click the graphic below for the historical numbers, but it shows that DEPPON LOGISTICS had CN¥1.78b of debt in September 2024, down from CN¥2.67b, one year before. However, its balance sheet shows it holds CN¥3.14b in cash, so it actually has CN¥1.36b net cash.

A Look At DEPPON LOGISTICS' Liabilities

We can see from the most recent balance sheet that DEPPON LOGISTICS had liabilities of CN¥6.85b falling due within a year, and liabilities of CN¥1.78b due beyond that. Offsetting this, it had CN¥3.14b in cash and CN¥3.96b in receivables that were due within 12 months. So it has liabilities totalling CN¥1.53b more than its cash and near-term receivables, combined.

Since publicly traded DEPPON LOGISTICS shares are worth a total of CN¥14.7b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, DEPPON LOGISTICS also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that DEPPON LOGISTICS has boosted its EBIT by 56%, thus reducing the spectre of future debt repayments. 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 DEPPON LOGISTICS can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. DEPPON LOGISTICS 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. Happily for any shareholders, DEPPON LOGISTICS actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While DEPPON LOGISTICS does have more liabilities than liquid assets, it also has net cash of CN¥1.36b. And it impressed us with free cash flow of CN¥2.2b, being 299% of its EBIT. So is DEPPON LOGISTICS's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 1 warning sign for DEPPON LOGISTICS you should be aware of.

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.