Iwatsuka Confectionery (TYO:2221) Seems To Use Debt Rather Sparingly

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. Importantly, Iwatsuka Confectionery Co., Ltd. (TYO:2221) does carry 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Iwatsuka Confectionery

How Much Debt Does Iwatsuka Confectionery Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Iwatsuka Confectionery had JP¥800.0m of debt, an increase on JP¥200.0m, over one year. However, it does have JP¥1.09b in cash offsetting this, leading to net cash of JP¥292.0m.

A Look At Iwatsuka Confectionery's Liabilities

According to the last reported balance sheet, Iwatsuka Confectionery had liabilities of JP¥4.50b due within 12 months, and liabilities of JP¥13.8b due beyond 12 months. On the other hand, it had cash of JP¥1.09b and JP¥4.16b worth of receivables due within a year. So its liabilities total JP¥13.1b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Iwatsuka Confectionery has a market capitalization of JP¥24.6b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Iwatsuka Confectionery also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Iwatsuka Confectionery grew its EBIT by 224% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Iwatsuka Confectionery's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Iwatsuka Confectionery 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 last two years, Iwatsuka Confectionery actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While Iwatsuka Confectionery does have more liabilities than liquid assets, it also has net cash of JP¥292.0m. The cherry on top was that in converted 151% of that EBIT to free cash flow, bringing in -JP¥464m. So is Iwatsuka Confectionery's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Iwatsuka Confectionery, 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.

If you’re looking to trade Iwatsuka Confectionery, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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