Japan Petroleum Exploration (TSE:1662) Could Easily Take On More Debt

The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, makes no bones about it when he says ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.’ So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Japan Petroleum Exploration Co., Ltd. (TSE:1662) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Japan Petroleum Exploration Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Japan Petroleum Exploration had JP¥2.86b of debt, an increase on none, over one year. However, it does have JP¥147.5b in cash offsetting this, leading to net cash of JP¥144.7b.

A Look At Japan Petroleum Exploration’s Liabilities

Zooming in on the latest balance sheet data, we can see that Japan Petroleum Exploration had liabilities of JP¥65.3b due within 12 months and liabilities of JP¥56.2b due beyond that. Offsetting this, it had JP¥147.5b in cash and JP¥54.9b in receivables that were due within 12 months. So it can boast JP¥80.9b more liquid assets than total liabilities.

This surplus liquidity suggests that Japan Petroleum Exploration’s balance sheet could take a hit just as well as Homer Simpson’s head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Japan Petroleum Exploration has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Japan Petroleum Exploration

On the other hand, Japan Petroleum Exploration saw its EBIT drop by 5.3% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There’s no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Japan Petroleum Exploration’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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Japan Petroleum Exploration 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 most recent three years, Japan Petroleum Exploration recorded free cash flow worth 61% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 Japan Petroleum Exploration has net cash of JP¥144.7b, as well as more liquid assets than liabilities. So is Japan Petroleum Exploration’s debt a risk? It doesn’t seem so to us. There’s no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we’ve discovered 3 warning signs for Japan Petroleum Exploration (1 doesn’t sit too well with us!) that you should be aware of before investing here.

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.