Is MatsukiyoCocokara (TSE:3088) Using Too Much Debt?

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.' 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 MatsukiyoCocokara & Co. (TSE:3088) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for MatsukiyoCocokara

How Much Debt Does MatsukiyoCocokara Carry?

As you can see below, MatsukiyoCocokara had JP¥19.4b of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have JP¥98.9b in cash offsetting this, leading to net cash of JP¥79.5b.

A Look At MatsukiyoCocokara's Liabilities

Zooming in on the latest balance sheet data, we can see that MatsukiyoCocokara had liabilities of JP¥157.8b due within 12 months and liabilities of JP¥47.5b due beyond that. Offsetting these obligations, it had cash of JP¥98.9b as well as receivables valued at JP¥63.1b due within 12 months. So it has liabilities totalling JP¥43.3b more than its cash and near-term receivables, combined.

Given MatsukiyoCocokara has a market capitalization of JP¥922.7b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, MatsukiyoCocokara boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that MatsukiyoCocokara grew its EBIT by 17% last year, making its debt load easier to handle. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the most recent three years, MatsukiyoCocokara recorded free cash flow worth 67% 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

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¥79.5b. The cherry on top was that in converted 67% of that EBIT to free cash flow, bringing in JP¥47b. So we don't think MatsukiyoCocokara's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in MatsukiyoCocokara, you may well want to click here to check an interactive graph of its earnings per share history.

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.