Is Persol HoldingsLtd (TSE:2181) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Persol Holdings Co.,Ltd. (TSE:2181) makes use of debt. But should shareholders be worried about its use of debt?

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When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Persol HoldingsLtd's Net Debt?

As you can see below, Persol HoldingsLtd had JP¥30.3b of debt at December 2024, down from JP¥46.1b a year prior. However, its balance sheet shows it holds JP¥98.7b in cash, so it actually has JP¥68.4b net cash.

How Strong Is Persol HoldingsLtd's Balance Sheet?

We can see from the most recent balance sheet that Persol HoldingsLtd had liabilities of JP¥258.6b falling due within a year, and liabilities of JP¥61.0b due beyond that. Offsetting this, it had JP¥98.7b in cash and JP¥197.4b in receivables that were due within 12 months. So its liabilities total JP¥23.5b more than the combination of its cash and short-term receivables.

Of course, Persol HoldingsLtd has a market capitalization of JP¥531.2b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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

Also positive, Persol HoldingsLtd grew its EBIT by 28% in the last year, and that should make it easier to pay down debt, going forward. 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 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 .

Finally, while the tax-man may adore accounting profits, lenders only accept 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. Over the last three years, Persol HoldingsLtd actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

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¥68.4b. The cherry on top was that in converted 101% of that EBIT to free cash flow, bringing in JP¥65b. So we don't think Persol HoldingsLtd's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Persol HoldingsLtd has 1 warning sign we think you should be aware of.

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.