Howard Marks put it nicely when he declared that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.’ 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. We can see that Almado, Inc. (TSE:4932) does utilize debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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 obtain debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that required capital to invest in growth at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt toobtainher.
What Is Almado’s Net Debt?
As you can see below, at the finish of December 2025, Almado had JP¥3.05b of debt, up from JP¥2.10b a year ago. Click the image for more detail. However, becautilize it has a cash reserve of JP¥1.48b, its net debt is less, at about JP¥1.57b.
A Look At Almado’s Liabilities
We can see from the most recent balance sheet that Almado had liabilities of JP¥3.71b falling due within a year, and liabilities of JP¥68.0m due beyond that. Offsetting this, it had JP¥1.48b in cash and JP¥1.55b in receivables that were due within 12 months. So it has liabilities totalling JP¥744.0m more than its cash and near-term receivables, combined.
Given Almado has a market capitalization of JP¥8.53b, it’s hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommfinish shareholders continue to monitor the balance sheet, going forward.
Check out our latest analysis for Almado
In order to size up a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).
We’d declare that Almado’s moderate net debt to EBITDA ratio ( being 2.2), indicates prudence when it comes to debt. And its commanding EBIT of 29.0 times its interest expense, implies the debt load is as light as a peacock feather. Unfortunately, Almado saw its EBIT slide 5.8% in the last twelve months. If that earnings trfinish continues then its debt load will grow heavy like the heart of a polar bear watching its sole cub. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Almado’s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it’s definitely worth viewing at the earnings trfinish. Click here for an interactive snapshot.
Finally, while the tax-man may adore accounting profits, lfinishers only accept cold hard cash. So we clearly required to view at whether that EBIT is leading to corresponding free cash flow. In the last three years, Almado’s free cash flow amounted to 36% of its EBIT, less than we’d expect. That weak cash conversion creates it more difficult to handle indebtedness.
Our View
On our analysis Almado’s interest cover should signal that it won’t have too much trouble with its debt. But the other factors we noted above weren’t so encouraging. For example, its EBIT growth rate creates us a little nervous about its debt. When we consider all the elements mentioned above, it seems to us that Almado is managing its debt quite well. But a word of caution: we consider debt levels are high enough to justify ongoing monitoring. 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 3 warning signs for Almado you should be aware of, and 1 of them is a bit unpleasant.
When all is declared and done, sometimes its clearer to focus on companies that don’t even required debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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 applying an unbiased methodology and our articles are not intfinished to be financial advice. It does not constitute a recommfinishation to acquire or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focutilized 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.
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