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 Yamazaki Co., Ltd. (TSE:6147) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.
See our latest analysis for Yamazaki
What Is Yamazaki's Debt?
As you can see below, Yamazaki had JP¥1.77b of debt at June 2024, down from JP¥2.16b a year prior. However, it also had JP¥946.0m in cash, and so its net debt is JP¥824.0m.
How Strong Is Yamazaki's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Yamazaki had liabilities of JP¥2.04b due within 12 months and liabilities of JP¥437.0m due beyond that. Offsetting these obligations, it had cash of JP¥946.0m as well as receivables valued at JP¥621.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥908.0m.
This is a mountain of leverage relative to its market capitalization of JP¥1.40b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Yamazaki will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, Yamazaki saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd 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¥49m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. 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 learn about the 5 warning signs we've spotted with Yamazaki (including 4 which don't sit too well with us) .
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.
About TSE:6147
Yamazaki
Manufactures and sells various machine tools in Japan and internationally.
Moderate with mediocre balance sheet.
