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.' 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. As with many other companies Yokohama Maruuo Co., Ltd. (TSE:8045) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Yokohama Maruuo
How Much Debt Does Yokohama Maruuo Carry?
The image below, which you can click on for greater detail, shows that Yokohama Maruuo had debt of JP¥331.0m at the end of March 2024, a reduction from JP¥780.0m over a year. But on the other hand it also has JP¥2.71b in cash, leading to a JP¥2.38b net cash position.
How Healthy Is Yokohama Maruuo's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Yokohama Maruuo had liabilities of JP¥3.85b due within 12 months and liabilities of JP¥3.46b due beyond that. Offsetting these obligations, it had cash of JP¥2.71b as well as receivables valued at JP¥3.20b due within 12 months. So it has liabilities totalling JP¥1.40b more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Yokohama Maruuo has a market capitalization of JP¥5.28b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Yokohama Maruuo boasts net cash, so it's fair to say it does not have a heavy debt load!
Better yet, Yokohama Maruuo grew its EBIT by 125% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Yokohama Maruuo will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Yokohama Maruuo 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. Happily for any shareholders, Yokohama Maruuo actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing Up
Although Yokohama Maruuo's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of JP¥2.38b. And it impressed us with free cash flow of JP¥1.5b, being 298% of its EBIT. So is Yokohama Maruuo's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Yokohama Maruuo that you should be aware of before investing here.
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.
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About TSE:8045
Excellent balance sheet average dividend payer.
