Is Morinaga&Co (TSE:2201) A Risky Investment?

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. We can see that Morinaga&Co., Ltd. (TSE:2201) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Morinaga&Co

What Is Morinaga&Co's Net Debt?

As you can see below, Morinaga&Co had JP¥19.0b of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. But it also has JP¥40.4b in cash to offset that, meaning it has JP¥21.4b net cash.

How Strong Is Morinaga&Co's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Morinaga&Co had liabilities of JP¥55.4b due within 12 months and liabilities of JP¥27.8b due beyond that. On the other hand, it had cash of JP¥40.4b and JP¥32.6b worth of receivables due within a year. So it has liabilities totalling JP¥10.2b more than its cash and near-term receivables, combined.

Given Morinaga&Co has a market capitalization of JP¥237.7b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Morinaga&Co also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Morinaga&Co grew its EBIT by 50% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Morinaga&Co can strengthen its balance sheet over time. 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. Morinaga&Co 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, Morinaga&Co recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Morinaga&Co has JP¥21.4b in net cash. And it impressed us with its EBIT growth of 50% over the last year. So we don't have any problem with Morinaga&Co's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Morinaga&Co you should know about.

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.