Is Recruit Holdings (TSE:6098) Using Too Much Debt?

Warren Buffett famously said, '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 note that Recruit Holdings Co., Ltd. (TSE:6098) 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?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Recruit Holdings

What Is Recruit Holdings's Debt?

The image below, which you can click on for greater detail, shows that Recruit Holdings had debt of JP¥21.4b at the end of December 2023, a reduction from JP¥49.0b over a year. But on the other hand it also has JP¥1.05t in cash, leading to a JP¥1.03t net cash position.

How Healthy Is Recruit Holdings' Balance Sheet?

We can see from the most recent balance sheet that Recruit Holdings had liabilities of JP¥694.4b falling due within a year, and liabilities of JP¥359.0b due beyond that. Offsetting these obligations, it had cash of JP¥1.05t as well as receivables valued at JP¥523.0b due within 12 months. So it actually has JP¥520.1b more liquid assets than total liabilities.

This surplus suggests that Recruit Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Recruit Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Recruit Holdings grew its EBIT by 13% last year, making its debt load easier to handle. 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 Recruit Holdings 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, a company can only pay off debt with cold hard cash, not accounting profits. While Recruit Holdings 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. During the last three years, Recruit Holdings generated free cash flow amounting to a very robust 97% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Recruit Holdings has net cash of JP¥1.03t, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥387b, being 97% of its EBIT. So we don't think Recruit Holdings's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Recruit Holdings's earnings per share history for free.

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.