Does Persol HoldingsLtd (TSE:2181) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Persol Holdings Co.,Ltd. (TSE:2181) makes use of debt. But is this debt a concern to shareholders?

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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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Persol HoldingsLtd Carry?

The image below, which you can click on for greater detail, shows that at June 2025 Persol HoldingsLtd had debt of JP¥40.3b, up from JP¥20.3b in one year. But it also has JP¥85.5b in cash to offset that, meaning it has JP¥45.2b net cash.

How Healthy Is Persol HoldingsLtd's Balance Sheet?

According to the last reported balance sheet, Persol HoldingsLtd had liabilities of JP¥280.8b due within 12 months, and liabilities of JP¥56.7b due beyond 12 months. Offsetting this, it had JP¥85.5b in cash and JP¥203.4b in receivables that were due within 12 months. So its liabilities total JP¥48.6b more than the combination of its cash and short-term receivables.

Given Persol HoldingsLtd has a market capitalization of JP¥567.7b, it's hard to believe these liabilities pose much threat. 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, Persol HoldingsLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

See our latest analysis for Persol HoldingsLtd

Persol HoldingsLtd's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of 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 Persol HoldingsLtd 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 Persol HoldingsLtd 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. Happily for any shareholders, Persol HoldingsLtd actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

We could understand if investors are concerned about Persol HoldingsLtd's liabilities, but we can be reassured by the fact it has has net cash of JP¥45.2b. The cherry on top was that in converted 110% of that EBIT to free cash flow, bringing in JP¥49b. So is Persol HoldingsLtd'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. For example, we've discovered 1 warning sign for Persol HoldingsLtd that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.