Ezaki Glico (TSE:2206) Seems To Use Debt Quite Sensibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Ezaki Glico Co., Ltd. (TSE:2206) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Ezaki Glico

What Is Ezaki Glico's Debt?

The chart below, which you can click on for greater detail, shows that Ezaki Glico had JP¥30.0b in debt in December 2023; about the same as the year before. But it also has JP¥97.2b in cash to offset that, meaning it has JP¥67.2b net cash.

How Healthy Is Ezaki Glico's Balance Sheet?

We can see from the most recent balance sheet that Ezaki Glico had liabilities of JP¥116.0b falling due within a year, and liabilities of JP¥16.6b due beyond that. On the other hand, it had cash of JP¥97.2b and JP¥48.3b worth of receivables due within a year. So it can boast JP¥12.9b more liquid assets than total liabilities.

This surplus suggests that Ezaki Glico has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Ezaki Glico has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Ezaki Glico grew its EBIT by 46% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Ezaki Glico 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. While Ezaki Glico 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 three years, Ezaki Glico reported free cash flow worth 11% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Ezaki Glico has net cash of JP¥67.2b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 46% over the last year. So we don't think Ezaki Glico's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Ezaki Glico that you should be aware of before investing here.

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.

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.