Yasunaga (TSE:7271) Has A Somewhat Strained Balance Sheet

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.' 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 Yasunaga Corporation (TSE:7271) makes use of debt. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Yasunaga's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2025 Yasunaga had JP¥17.0b of debt, an increase on JP¥15.5b, over one year. However, because it has a cash reserve of JP¥7.07b, its net debt is less, at about JP¥9.93b.

A Look At Yasunaga's Liabilities

According to the last reported balance sheet, Yasunaga had liabilities of JP¥16.0b due within 12 months, and liabilities of JP¥9.74b due beyond 12 months. On the other hand, it had cash of JP¥7.07b and JP¥6.53b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥12.2b.

This deficit casts a shadow over the JP¥6.47b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Yasunaga would likely require a major re-capitalisation if it had to pay its creditors today.

Check out our latest analysis for Yasunaga

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Yasunaga has a debt to EBITDA ratio of 3.7 and its EBIT covered its interest expense 7.0 times. Taken together this implies that, while we wouldn't want to see debt levels rise, we think it can handle its current leverage. One way Yasunaga could vanquish its debt would be if it stops borrowing more but continues to grow EBIT at around 20%, as it did over the last year. When analysing debt levels, the balance sheet is the obvious place to start. But it is Yasunaga'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. In the last three years, Yasunaga created free cash flow amounting to 5.1% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

We'd go so far as to say Yasunaga's level of total liabilities was disappointing. But at least it's pretty decent at growing its EBIT; that's encouraging. We're quite clear that we consider Yasunaga to be really rather risky, as a result of its balance sheet health. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Yasunaga (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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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.