We Think Oriental Land (TSE:4661) Can Stay On Top Of Its Debt

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.' 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 the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Oriental Land

What Is Oriental Land's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Oriental Land had JP¥297.8b of debt, an increase on JP¥240.0b, over one year. However, it does have JP¥453.0b in cash offsetting this, leading to net cash of JP¥155.2b.

A Look At Oriental Land's Liabilities

According to the last reported balance sheet, Oriental Land had liabilities of JP¥217.3b due within 12 months, and liabilities of JP¥236.5b due beyond 12 months. Offsetting this, it had JP¥453.0b in cash and JP¥30.1b in receivables that were due within 12 months. So it can boast JP¥29.4b 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 it's very unlikely that the JP¥5.59t company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Oriental Land boasts net cash, so it's fair to say it does not have a heavy debt load!

Oriental Land's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Oriental Land can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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 59% 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¥155.2b, as well as more liquid assets than liabilities. So we don't think Oriental Land's use of debt is risky. 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.

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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.