Obayashi (TSE:1802) Seems To Use Debt Quite Sensibly

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Obayashi Corporation (TSE:1802) does carry debt. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

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 think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Obayashi Carry?

The image below, which you can click on for greater detail, shows that Obayashi had debt of JP¥357.3b at the end of June 2025, a reduction from JP¥394.4b over a year. However, it does have JP¥468.1b in cash offsetting this, leading to net cash of JP¥110.8b.

How Strong Is Obayashi's Balance Sheet?

The latest balance sheet data shows that Obayashi had liabilities of JP¥1.34t due within a year, and liabilities of JP¥373.8b falling due after that. Offsetting these obligations, it had cash of JP¥468.1b as well as receivables valued at JP¥984.0b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥262.5b.

Of course, Obayashi has a titanic market capitalization of JP¥1.69t, 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, Obayashi also has more cash than debt, so we're pretty confident it can manage its debt safely.

View our latest analysis for Obayashi

On top of that, Obayashi grew its EBIT by 59% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Obayashi can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Obayashi 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, Obayashi's free cash flow amounted to 27% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While Obayashi does have more liabilities than liquid assets, it also has net cash of JP¥110.8b. And we liked the look of last year's 59% year-on-year EBIT growth. So is Obayashi'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. Case in point: We've spotted 2 warning signs for Obayashi you should be aware of.

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.

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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.