These 4 Measures Indicate That MonotaRO (TSE:3064) 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.' 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. We note that MonotaRO Co., Ltd. (TSE:3064) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

What Is MonotaRO's Debt?

The image below, which you can click on for greater detail, shows that at June 2025 MonotaRO had debt of JP¥9.32b, up from JP¥2.92b in one year. But on the other hand it also has JP¥35.8b in cash, leading to a JP¥26.5b net cash position.

How Strong Is MonotaRO's Balance Sheet?

According to the last reported balance sheet, MonotaRO had liabilities of JP¥38.9b due within 12 months, and liabilities of JP¥12.7b due beyond 12 months. Offsetting this, it had JP¥35.8b in cash and JP¥45.6b in receivables that were due within 12 months. So it actually has JP¥29.8b more liquid assets than total liabilities.

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

Check out our latest analysis for MonotaRO

Also positive, MonotaRO grew its EBIT by 22% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine MonotaRO'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. MonotaRO 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. Over the most recent three years, MonotaRO recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that MonotaRO has net cash of JP¥26.5b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 22% over the last year. So is MonotaRO's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in MonotaRO, you may well want to click here to check an interactive graph of its earnings per share history.

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.