These 4 Measures Indicate That Oriental Land (TSE:4661) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Oriental Land Co., Ltd. (TSE:4661) makes use of debt. But is this debt a concern to shareholders?

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What Risk Does Debt Bring?

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, 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.

How Much Debt Does Oriental Land Carry?

As you can see below, at the end of December 2024, Oriental Land had JP¥297.4b of debt, up from JP¥239.6b a year ago. Click the image for more detail. But it also has JP¥443.1b in cash to offset that, meaning it has JP¥145.7b net cash.

How Strong Is Oriental Land's Balance Sheet?

We can see from the most recent balance sheet that Oriental Land had liabilities of JP¥233.8b falling due within a year, and liabilities of JP¥237.2b due beyond that. Offsetting this, it had JP¥443.1b in cash and JP¥34.4b in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Oriental Land's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the JP¥5.00t company is short on cash, but still worth keeping an eye on the 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.

View our latest analysis for Oriental Land

But the other side of the story is that Oriental Land saw its EBIT decline by 5.1% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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. While Oriental Land 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. Over the most recent three years, Oriental Land recorded free cash flow worth 62% 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 we empathize with investors who find debt concerning, you should keep in mind that Oriental Land has net cash of JP¥145.7b, as well as more liquid assets than liabilities. So we don't have any problem with Oriental Land's use of debt. 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.

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.