These 4 Measures Indicate That ABC-MartInc (TSE:2670) Is Using Debt Safely

Warren Buffett famously said, '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 ABC-Mart,Inc. (TSE:2670) 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 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does ABC-MartInc Carry?

The image below, which you can click on for greater detail, shows that ABC-MartInc had debt of JP¥2.57b at the end of August 2025, a reduction from JP¥2.92b over a year. But on the other hand it also has JP¥207.3b in cash, leading to a JP¥204.7b net cash position.

How Healthy Is ABC-MartInc's Balance Sheet?

We can see from the most recent balance sheet that ABC-MartInc had liabilities of JP¥58.6b falling due within a year, and liabilities of JP¥1.95b due beyond that. On the other hand, it had cash of JP¥207.3b and JP¥17.9b worth of receivables due within a year. So it can boast JP¥164.7b more liquid assets than total liabilities.

This surplus suggests that ABC-MartInc is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, ABC-MartInc boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for ABC-MartInc

Fortunately, ABC-MartInc grew its EBIT by 2.9% in the last year, making that debt load look even more manageable. 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 ABC-MartInc'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, a company can only pay off debt with cold hard cash, not accounting profits. While ABC-MartInc 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, ABC-MartInc recorded free cash flow worth 58% 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 it is always sensible to investigate a company's debt, in this case ABC-MartInc has JP¥204.7b in net cash and a decent-looking balance sheet. So we don't think ABC-MartInc's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for ABC-MartInc you should know about.

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.