OhmoriyaLtd (TYO:2917) Has A Pretty Healthy Balance Sheet

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. Importantly, Ohmoriya Co.,Ltd. (TYO:2917) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for OhmoriyaLtd

What Is OhmoriyaLtd's Net Debt?

As you can see below, OhmoriyaLtd had JP¥211.0m of debt at December 2020, down from JP¥283.0m a year prior. However, its balance sheet shows it holds JP¥1.63b in cash, so it actually has JP¥1.42b net cash.

How Healthy Is OhmoriyaLtd's Balance Sheet?

We can see from the most recent balance sheet that OhmoriyaLtd had liabilities of JP¥2.82b falling due within a year, and liabilities of JP¥546.0m due beyond that. Offsetting this, it had JP¥1.63b in cash and JP¥3.47b in receivables that were due within 12 months. So it actually has JP¥1.74b more liquid assets than total liabilities.

This surplus liquidity suggests that OhmoriyaLtd's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that OhmoriyaLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact OhmoriyaLtd's saving grace is its low debt levels, because its EBIT has tanked 21% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since OhmoriyaLtd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. OhmoriyaLtd 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, OhmoriyaLtd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that OhmoriyaLtd has net cash of JP¥1.42b, as well as more liquid assets than liabilities. So we are not troubled with OhmoriyaLtd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 4 warning signs we've spotted with OhmoriyaLtd (including 1 which is concerning) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.
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