Mos Food Services (TSE:8153) Has A Rock Solid Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Mos Food Services, Inc. (TSE:8153) makes use of debt. But the real question is whether this debt is making the company risky.

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Mos Food Services

What Is Mos Food Services's Net Debt?

The image below, which you can click on for greater detail, shows that Mos Food Services had debt of JP¥2.99b at the end of March 2024, a reduction from JP¥3.72b over a year. However, it does have JP¥23.6b in cash offsetting this, leading to net cash of JP¥20.6b.

How Healthy Is Mos Food Services' Balance Sheet?

We can see from the most recent balance sheet that Mos Food Services had liabilities of JP¥18.7b falling due within a year, and liabilities of JP¥8.95b due beyond that. Offsetting these obligations, it had cash of JP¥23.6b as well as receivables valued at JP¥11.0b due within 12 months. So it actually has JP¥6.98b more liquid assets than total liabilities.

This short term liquidity is a sign that Mos Food Services could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Mos Food Services boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Mos Food Services grew its EBIT by 9,864% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Mos Food Services'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. Mos Food Services 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 last three years, Mos Food Services actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Mos Food Services has JP¥20.6b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥5.7b, being 134% of its EBIT. So is Mos Food Services'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 Mos Food Services's earnings per share history for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

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