We Think Okamura (TSE:7994) Can Stay On Top Of Its Debt

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.' 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 can see that Okamura Corporation (TSE:7994) does use debt in its business. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Okamura

What Is Okamura's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Okamura had JP¥29.3b of debt, an increase on JP¥22.3b, over one year. But it also has JP¥36.6b in cash to offset that, meaning it has JP¥7.31b net cash.

How Healthy Is Okamura's Balance Sheet?

We can see from the most recent balance sheet that Okamura had liabilities of JP¥56.3b falling due within a year, and liabilities of JP¥37.5b due beyond that. On the other hand, it had cash of JP¥36.6b and JP¥69.4b worth of receivables due within a year. So it can boast JP¥12.2b more liquid assets than total liabilities.

This short term liquidity is a sign that Okamura could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Okamura boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Okamura grew its EBIT at 13% over the last year, further increasing its ability to manage debt. 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 Okamura 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 Okamura 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, Okamura recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Okamura has net cash of JP¥7.31b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 13% in the last twelve months. So we are not troubled with Okamura's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Okamura 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.