Is Ohsho Food Service (TSE:9936) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Ohsho Food Service Corp. (TSE:9936) makes use of debt. But the real question is whether this debt is making the company risky.

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Ohsho Food Service's Debt?

As you can see below, Ohsho Food Service had JP¥5.50b of debt at December 2024, down from JP¥7.50b a year prior. However, its balance sheet shows it holds JP¥35.0b in cash, so it actually has JP¥29.5b net cash.

How Healthy Is Ohsho Food Service's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ohsho Food Service had liabilities of JP¥13.9b due within 12 months and liabilities of JP¥6.39b due beyond that. On the other hand, it had cash of JP¥35.0b and JP¥2.89b worth of receivables due within a year. So it can boast JP¥17.6b more liquid assets than total liabilities.

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

Check out our latest analysis for Ohsho Food Service

Fortunately, Ohsho Food Service grew its EBIT by 7.3% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Ohsho Food Service'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Ohsho Food Service 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, Ohsho Food Service recorded free cash flow worth 72% 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 it is always sensible to investigate a company's debt, in this case Ohsho Food Service has JP¥29.5b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥6.8b, being 72% of its EBIT. So we don't think Ohsho Food Service'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 Ohsho Food Service'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.

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

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.