Is Oriental Land (TSE:4661) A Risky Investment?

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 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 note that Oriental Land Co., Ltd. (TSE:4661) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

View our latest analysis for Oriental Land

What Is Oriental Land's Debt?

The image below, which you can click on for greater detail, shows that Oriental Land had debt of JP¥209.0b at the end of March 2024, a reduction from JP¥241.0b over a year. But on the other hand it also has JP¥397.0b in cash, leading to a JP¥188.1b net cash position.

How Healthy Is Oriental Land's Balance Sheet?

We can see from the most recent balance sheet that Oriental Land had liabilities of JP¥247.0b falling due within a year, and liabilities of JP¥158.7b due beyond that. Offsetting this, it had JP¥397.0b in cash and JP¥28.8b in receivables that were due within 12 months. So it can boast JP¥20.2b more liquid assets than total liabilities.

Having regard to Oriental Land's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the JP¥7.68t company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Oriental Land has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Oriental Land has boosted its EBIT by 49%, thus reducing the spectre of future debt repayments. 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 Oriental Land'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. Oriental Land 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, Oriental Land recorded free cash flow worth 60% 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

While it is always sensible to investigate a company's debt, in this case Oriental Land has JP¥188.1b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 49% over the last year. So is Oriental Land'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 Oriental Land's earnings per share history for free.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.