Is Wacoal Holdings (TSE:3591) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Wacoal Holdings Corp. (TSE:3591) does use debt in its business. But the more important question is: how much risk is that debt creating?

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Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Wacoal Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Wacoal Holdings had JP¥12.2b of debt in September 2025, down from JP¥14.5b, one year before. However, its balance sheet shows it holds JP¥38.8b in cash, so it actually has JP¥26.7b net cash.

How Strong Is Wacoal Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Wacoal Holdings had liabilities of JP¥45.7b due within 12 months and liabilities of JP¥33.4b due beyond that. Offsetting these obligations, it had cash of JP¥38.8b as well as receivables valued at JP¥16.4b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥23.9b.

Since publicly traded Wacoal Holdings shares are worth a total of JP¥245.9b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Wacoal Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

View our latest analysis for Wacoal Holdings

It is just as well that Wacoal Holdings's load is not too heavy, because its EBIT was down 60% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Wacoal Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Wacoal Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last two years, Wacoal Holdings's free cash flow amounted to 46% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Wacoal Holdings has JP¥26.7b in net cash. So we don't have any problem with Wacoal Holdings's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Wacoal Holdings has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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.