Yoshinoya Holdings (TSE:9861) Could Easily Take On More Debt

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 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 Yoshinoya Holdings Co., Ltd. (TSE:9861) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Yoshinoya Holdings

What Is Yoshinoya Holdings's Debt?

The image below, which you can click on for greater detail, shows that Yoshinoya Holdings had debt of JP¥19.2b at the end of August 2024, a reduction from JP¥23.0b over a year. But on the other hand it also has JP¥23.3b in cash, leading to a JP¥4.12b net cash position.

How Healthy Is Yoshinoya Holdings' Balance Sheet?

According to the last reported balance sheet, Yoshinoya Holdings had liabilities of JP¥37.9b due within 12 months, and liabilities of JP¥16.6b due beyond 12 months. Offsetting these obligations, it had cash of JP¥23.3b as well as receivables valued at JP¥6.74b due within 12 months. So it has liabilities totalling JP¥24.5b more than its cash and near-term receivables, combined.

Of course, Yoshinoya Holdings has a market capitalization of JP¥206.9b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Yoshinoya Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Yoshinoya Holdings 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 Yoshinoya Holdings'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 Yoshinoya Holdings 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. Happily for any shareholders, Yoshinoya Holdings actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although Yoshinoya Holdings's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of JP¥4.12b. The cherry on top was that in converted 136% of that EBIT to free cash flow, bringing in JP¥2.7b. So we don't think Yoshinoya Holdings's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Yoshinoya Holdings, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.