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 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 Yamazaki Co., Ltd. (TSE:6147) does use debt in its business. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Yamazaki
What Is Yamazaki's Net Debt?
As you can see below, Yamazaki had JP¥1.84b of debt at March 2024, down from JP¥2.17b a year prior. On the flip side, it has JP¥1.02b in cash leading to net debt of about JP¥813.0m.
How Strong Is Yamazaki's Balance Sheet?
We can see from the most recent balance sheet that Yamazaki had liabilities of JP¥1.99b falling due within a year, and liabilities of JP¥393.0m due beyond that. On the other hand, it had cash of JP¥1.02b and JP¥688.0m worth of receivables due within a year. So its liabilities total JP¥675.0m more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since Yamazaki has a market capitalization of JP¥1.24b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Yamazaki will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Yamazaki had a loss before interest and tax, and actually shrunk its revenue by 6.0%, to JP¥2.5b. We would much prefer see growth.
Caveat Emptor
Over the last twelve months Yamazaki produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at JP¥97m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled JP¥167m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 5 warning signs we've spotted with Yamazaki .
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.
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About TSE:6147
Yamazaki
Manufactures and sells various machine tools in Japan and internationally.
Moderate and slightly overvalued.
