We Think Yuasa Funashoku (TSE:8006) Can Manage Its Debt With Ease

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Yuasa Funashoku Co., Ltd. (TSE:8006) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Yuasa Funashoku Carry?

The image below, which you can click on for greater detail, shows that at December 2024 Yuasa Funashoku had debt of JP¥2.09b, up from JP¥1.90b in one year. However, it does have JP¥10.5b in cash offsetting this, leading to net cash of JP¥8.37b.

A Look At Yuasa Funashoku's Liabilities

Zooming in on the latest balance sheet data, we can see that Yuasa Funashoku had liabilities of JP¥25.6b due within 12 months and liabilities of JP¥2.30b due beyond that. On the other hand, it had cash of JP¥10.5b and JP¥22.3b worth of receivables due within a year. So it can boast JP¥4.83b more liquid assets than total liabilities.

This excess liquidity suggests that Yuasa Funashoku is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Yuasa Funashoku boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Yuasa Funashoku

In addition to that, we're happy to report that Yuasa Funashoku has boosted its EBIT by 44%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Yuasa Funashoku will need earnings to service that debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Yuasa Funashoku 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, Yuasa Funashoku produced sturdy free cash flow equating to 58% 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

While it is always sensible to investigate a company's debt, in this case Yuasa Funashoku has JP¥8.37b in net cash and a decent-looking balance sheet. And we liked the look of last year's 44% year-on-year EBIT growth. So is Yuasa Funashoku's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Yuasa Funashoku that you should be aware of.

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.