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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that Oriental Land Co., Ltd. (TSE:4661) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Oriental Land

What Is Oriental Land's Net Debt?

As you can see below, Oriental Land had JP¥208.6b of debt at June 2024, down from JP¥240.6b a year prior. But on the other hand it also has JP¥361.7b in cash, leading to a JP¥153.1b net cash position.

How Healthy Is Oriental Land's Balance Sheet?

The latest balance sheet data shows that Oriental Land had liabilities of JP¥201.8b due within a year, and liabilities of JP¥157.4b falling due after that. Offsetting these obligations, it had cash of JP¥361.7b as well as receivables valued at JP¥29.4b due within 12 months. So it actually has JP¥32.0b 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¥6.34t company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Oriental Land boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Oriental Land has been able to increase its EBIT by 21% in twelve months, making it easier to pay down debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. During the last three years, Oriental Land produced sturdy free cash flow equating to 68% 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 we empathize with investors who find debt concerning, you should keep in mind that Oriental Land has net cash of JP¥153.1b, as well as more liquid assets than liabilities. And we liked the look of last year's 21% year-on-year EBIT growth. So we don't think Oriental Land's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Oriental Land, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.