Is MatsukiyoCocokara (TSE:3088) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies MatsukiyoCocokara & Co. (TSE:3088) makes use of debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for MatsukiyoCocokara

What Is MatsukiyoCocokara's Debt?

As you can see below, MatsukiyoCocokara had JP¥19.5b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds JP¥113.4b in cash, so it actually has JP¥93.9b net cash.

How Strong Is MatsukiyoCocokara's Balance Sheet?

The latest balance sheet data shows that MatsukiyoCocokara had liabilities of JP¥175.6b due within a year, and liabilities of JP¥29.0b falling due after that. Offsetting this, it had JP¥113.4b in cash and JP¥57.9b in receivables that were due within 12 months. So its liabilities total JP¥33.3b more than the combination of its cash and short-term receivables.

Given MatsukiyoCocokara has a market capitalization of JP¥902.2b, 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, MatsukiyoCocokara boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that MatsukiyoCocokara has increased its EBIT by 5.9% over twelve months, which should ease any concerns about debt repayment. 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 MatsukiyoCocokara'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. While MatsukiyoCocokara 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. During the last three years, MatsukiyoCocokara produced sturdy free cash flow equating to 71% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about MatsukiyoCocokara's liabilities, but we can be reassured by the fact it has has net cash of JP¥93.9b. The cherry on top was that in converted 71% of that EBIT to free cash flow, bringing in JP¥61b. So is MatsukiyoCocokara's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of MatsukiyoCocokara's earnings per share history for free.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.