Is Phil Company (TSE:3267) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Phil Company, Inc. (TSE:3267) makes use of debt. But should shareholders be worried about its use of debt?

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What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Phil Company Carry?

You can click the graphic below for the historical numbers, but it shows that as of August 2025 Phil Company had JP¥2.33b of debt, an increase on JP¥1.64b, over one year. However, it does have JP¥4.37b in cash offsetting this, leading to net cash of JP¥2.04b.

A Look At Phil Company's Liabilities

We can see from the most recent balance sheet that Phil Company had liabilities of JP¥4.41b falling due within a year, and liabilities of JP¥956.0m due beyond that. On the other hand, it had cash of JP¥4.37b and JP¥302.0m worth of receivables due within a year. So its liabilities total JP¥694.0m more than the combination of its cash and short-term receivables.

Of course, Phil Company has a market capitalization of JP¥5.60b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Phil Company boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Phil Company

While Phil Company doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Phil Company's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Phil Company 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. Happily for any shareholders, Phil Company actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Phil Company does have more liabilities than liquid assets, it also has net cash of JP¥2.04b. The cherry on top was that in converted 247% of that EBIT to free cash flow, bringing in JP¥1.7b. So is Phil Company's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Phil Company has 2 warning signs we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.