These 4 Measures Indicate That YONEX (TSE:7906) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that YONEX Co., Ltd. (TSE:7906) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for YONEX

How Much Debt Does YONEX Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 YONEX had JP¥9.52b of debt, an increase on JP¥3.16b, over one year. However, its balance sheet shows it holds JP¥31.2b in cash, so it actually has JP¥21.6b net cash.

How Strong Is YONEX's Balance Sheet?

The latest balance sheet data shows that YONEX had liabilities of JP¥21.2b due within a year, and liabilities of JP¥15.0b falling due after that. On the other hand, it had cash of JP¥31.2b and JP¥19.1b worth of receivables due within a year. So it can boast JP¥14.1b more liquid assets than total liabilities.

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

In addition to that, we're happy to report that YONEX has boosted its EBIT by 60%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine YONEX'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. YONEX 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 three years, YONEX's free cash flow amounted to 32% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that YONEX has net cash of JP¥21.6b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 60% over the last year. So we don't think YONEX's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for YONEX you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.