Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Yamaha Corporation (TSE:7951) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
What Is Yamaha's Debt?
As you can see below, at the end of September 2025, Yamaha had JP¥6.71b of debt, up from JP¥2.23b a year ago. Click the image for more detail. But on the other hand it also has JP¥107.5b in cash, leading to a JP¥100.8b net cash position.
How Healthy Is Yamaha's Balance Sheet?
According to the last reported balance sheet, Yamaha had liabilities of JP¥101.3b due within 12 months, and liabilities of JP¥35.8b due beyond 12 months. Offsetting this, it had JP¥107.5b in cash and JP¥80.3b in receivables that were due within 12 months. So it actually has JP¥50.7b more liquid assets than total liabilities.
This short term liquidity is a sign that Yamaha could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Yamaha boasts net cash, so it's fair to say it does not have a heavy debt load!
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Another good sign is that Yamaha has been able to increase its EBIT by 26% in twelve months, making it easier to pay down debt. 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 Yamaha's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Yamaha 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. Over the most recent three years, Yamaha recorded free cash flow worth 51% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Yamaha has net cash of JP¥100.8b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 26% over the last year. So is Yamaha's debt a risk? It doesn't seem so to us. 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. We've identified 1 warning sign with Yamaha , and understanding them should be part of your investment process.
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.