Does MonotaRO (TSE:3064) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that MonotaRO Co., Ltd. (TSE:3064) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for MonotaRO

What Is MonotaRO's Net Debt?

As you can see below, MonotaRO had JP¥474.0m of debt at September 2024, down from JP¥5.17b a year prior. However, it does have JP¥22.1b in cash offsetting this, leading to net cash of JP¥21.7b.

How Strong Is MonotaRO's Balance Sheet?

We can see from the most recent balance sheet that MonotaRO had liabilities of JP¥30.9b falling due within a year, and liabilities of JP¥4.51b due beyond that. Offsetting these obligations, it had cash of JP¥22.1b as well as receivables valued at JP¥37.6b due within 12 months. So it actually has JP¥24.3b more liquid assets than total liabilities.

Having regard to MonotaRO's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the JP¥1.25t company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, MonotaRO boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that MonotaRO grew its EBIT at 19% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if MonotaRO can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While MonotaRO 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. Looking at the most recent three years, MonotaRO recorded free cash flow of 49% of its EBIT, which is weaker 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 MonotaRO has net cash of JP¥21.7b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 19% over the last year. So we don't think MonotaRO's use of debt is risky. 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 instance, we've identified 1 warning sign for MonotaRO that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.