Does Yamaya (TSE:9994) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Yamaya Corporation (TSE:9994) does use debt in its business. But the real question is whether this debt is making the company risky.

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When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

What Is Yamaya's Debt?

You can click the graphic below for the historical numbers, but it shows that Yamaya had JP¥7.20b of debt in December 2024, down from JP¥7.83b, one year before. However, it does have JP¥15.9b in cash offsetting this, leading to net cash of JP¥8.70b.

A Look At Yamaya's Liabilities

The latest balance sheet data shows that Yamaya had liabilities of JP¥25.4b due within a year, and liabilities of JP¥7.18b falling due after that. On the other hand, it had cash of JP¥15.9b and JP¥7.78b worth of receivables due within a year. So it has liabilities totalling JP¥8.94b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Yamaya is worth JP¥27.7b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Yamaya also has more cash than debt, so we're pretty confident it can manage its debt safely.

See our latest analysis for Yamaya

Fortunately, Yamaya grew its EBIT by 2.5% in the last year, making that debt load look even more manageable. 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 Yamaya 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Yamaya 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, Yamaya recorded free cash flow worth 67% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While Yamaya does have more liabilities than liquid assets, it also has net cash of JP¥8.70b. The cherry on top was that in converted 67% of that EBIT to free cash flow, bringing in JP¥1.1b. So we don't have any problem with Yamaya's use of debt. 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 Yamaya'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.