Is Matsuoka (TSE:3611) Using Debt In A Risky Way?

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.' 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 Matsuoka Corporation (TSE:3611) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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. 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 Matsuoka

How Much Debt Does Matsuoka Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Matsuoka had debt of JP¥15.7b, up from JP¥14.8b in one year. But it also has JP¥18.7b in cash to offset that, meaning it has JP¥3.01b net cash.

A Look At Matsuoka's Liabilities

The latest balance sheet data shows that Matsuoka had liabilities of JP¥21.7b due within a year, and liabilities of JP¥10.1b falling due after that. Offsetting these obligations, it had cash of JP¥18.7b as well as receivables valued at JP¥11.6b due within 12 months. So it has liabilities totalling JP¥1.54b more than its cash and near-term receivables, combined.

Given Matsuoka has a market capitalization of JP¥20.2b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Matsuoka boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Matsuoka's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Matsuoka wasn't profitable at an EBIT level, but managed to grow its revenue by 4.5%, to JP¥66b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Matsuoka?

Although Matsuoka had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of JP¥2.2b. 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. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Matsuoka (including 1 which is a bit unpleasant) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.