Recruit Holdings (TSE:6098) Seems To Use Debt Rather Sparingly

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.' 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. Importantly, Recruit Holdings Co., Ltd. (TSE:6098) does carry debt. But the real question is whether this debt is making the company risky.

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When Is Debt Dangerous?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

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¥863.0m at the end of June 2025, a reduction from JP¥1.18b over a year. But it also has JP¥509.7b in cash to offset that, meaning it has JP¥508.9b net cash.

A Look At Recruit Holdings' Liabilities

We can see from the most recent balance sheet that Recruit Holdings had liabilities of JP¥758.0b falling due within a year, and liabilities of JP¥333.1b due beyond that. On the other hand, it had cash of JP¥509.7b and JP¥562.7b worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Recruit Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the JP¥11t company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Recruit Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Recruit Holdings

Also positive, Recruit Holdings grew its EBIT by 21% 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 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Over the last three years, Recruit Holdings recorded free cash flow worth a fulsome 99% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

We could understand if investors are concerned about Recruit Holdings's liabilities, but we can be reassured by the fact it has has net cash of JP¥508.9b. The cherry on top was that in converted 99% of that EBIT to free cash flow, bringing in JP¥539b. So we don't think Recruit Holdings'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 instance, we've identified 1 warning sign for Recruit Holdings that you should be aware of.

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.