Is Matsumoto (TSE:7901) Using Debt In A Risky Way?

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.' 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 Matsumoto Inc. (TSE:7901) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Matsumoto

How Much Debt Does Matsumoto Carry?

As you can see below, at the end of October 2023, Matsumoto had JP¥271.0m of debt, up from JP¥99.0m a year ago. Click the image for more detail. But on the other hand it also has JP¥298.0m in cash, leading to a JP¥27.0m net cash position.

A Look At Matsumoto's Liabilities

According to the last reported balance sheet, Matsumoto had liabilities of JP¥599.0m due within 12 months, and liabilities of JP¥369.0m due beyond 12 months. On the other hand, it had cash of JP¥298.0m and JP¥180.0m worth of receivables due within a year. So it has liabilities totalling JP¥490.0m more than its cash and near-term receivables, combined.

Since publicly traded Matsumoto shares are worth a total of JP¥3.63b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Matsumoto also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Matsumoto will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Matsumoto made a loss at the EBIT level, and saw its revenue drop to JP¥2.2b, which is a fall of 3.4%. We would much prefer see growth.

So How Risky Is Matsumoto?

While Matsumoto lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of JP¥75m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Matsumoto (at least 1 which is significant) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.