These 4 Measures Indicate That AGP (TSE:9377) Is Using Debt Safely

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies AGP Corporation (TSE:9377) makes use of debt. But the real question is whether this debt is making the company risky.

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Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need 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 together.

What Is AGP's Net Debt?

As you can see below, AGP had JP¥378.0m of debt at March 2025, down from JP¥607.0m a year prior. However, it does have JP¥3.36b in cash offsetting this, leading to net cash of JP¥2.98b.

How Strong Is AGP's Balance Sheet?

We can see from the most recent balance sheet that AGP had liabilities of JP¥2.03b falling due within a year, and liabilities of JP¥2.15b due beyond that. Offsetting this, it had JP¥3.36b in cash and JP¥2.48b in receivables that were due within 12 months. So it actually has JP¥1.66b more liquid assets than total liabilities.

This short term liquidity is a sign that AGP could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, AGP boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for AGP

Another good sign is that AGP has been able to increase its EBIT by 27% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since AGP will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While AGP 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. In the last three years, AGP's free cash flow amounted to 33% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that AGP has net cash of JP¥2.98b, as well as more liquid assets than liabilities. And we liked the look of last year's 27% year-on-year EBIT growth. So we don't think AGP's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for AGP (1 is a bit concerning!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.