Morimatsu International Holdings (HKG:2155) Seems To Use Debt Quite Sensibly

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. Importantly, Morimatsu International Holdings Company Limited (HKG:2155) does carry debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Morimatsu International Holdings

What Is Morimatsu International Holdings's Debt?

The image below, which you can click on for greater detail, shows that Morimatsu International Holdings had debt of CN¥365.1m at the end of December 2023, a reduction from CN¥444.2m over a year. However, it does have CN¥2.23b in cash offsetting this, leading to net cash of CN¥1.86b.

How Strong Is Morimatsu International Holdings' Balance Sheet?

The latest balance sheet data shows that Morimatsu International Holdings had liabilities of CN¥4.27b due within a year, and liabilities of CN¥270.5m falling due after that. Offsetting this, it had CN¥2.23b in cash and CN¥2.18b in receivables that were due within 12 months. So it has liabilities totalling CN¥138.3m more than its cash and near-term receivables, combined.

Of course, Morimatsu International Holdings has a market capitalization of CN¥5.89b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Morimatsu International Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

Another good sign is that Morimatsu International Holdings has been able to increase its EBIT by 25% 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 it is future earnings, more than anything, that will determine Morimatsu International Holdings'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Morimatsu International Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Morimatsu International Holdings's free cash flow amounted to 39% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Morimatsu International Holdings's liabilities, but we can be reassured by the fact it has has net cash of CN¥1.86b. And we liked the look of last year's 25% year-on-year EBIT growth. So we don't think Morimatsu International Holdings'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. Case in point: We've spotted 2 warning signs for Morimatsu International Holdings you should be aware of, and 1 of them is potentially serious.

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.