These 4 Measures Indicate That Recruit Holdings (TSE:6098) Is Using Debt Safely

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. 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?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

See our latest analysis for Recruit Holdings

What Is Recruit Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Recruit Holdings had debt of JP¥1.02b at the end of September 2024, a reduction from JP¥21.5b over a year. But it also has JP¥757.7b in cash to offset that, meaning it has JP¥756.7b net cash.

How Strong Is Recruit Holdings' Balance Sheet?

We can see from the most recent balance sheet that Recruit Holdings had liabilities of JP¥726.4b falling due within a year, and liabilities of JP¥337.6b due beyond that. On the other hand, it had cash of JP¥757.7b and JP¥540.3b worth of receivables due within a year. So it actually has JP¥234.0b more liquid assets than total liabilities.

Having regard to Recruit Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the JP¥17t company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Recruit Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Recruit Holdings grew its EBIT by 18% last year, making its debt load easier to handle. 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 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Happily for any shareholders, Recruit Holdings 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

While we empathize with investors who find debt concerning, you should keep in mind that Recruit Holdings has net cash of JP¥756.7b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥502b, being 103% of its EBIT. So is Recruit Holdings's debt a risk? It doesn't seem so to us. 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, we've discovered 1 warning sign for Recruit Holdings 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.