Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Yamazaki Baking Co., Ltd. (TSE:2212) does use debt in its business. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Yamazaki Baking
What Is Yamazaki Baking's Debt?
You can click the graphic below for the historical numbers, but it shows that Yamazaki Baking had JP¥68.6b of debt in June 2024, down from JP¥74.7b, one year before. But it also has JP¥139.3b in cash to offset that, meaning it has JP¥70.7b net cash.
How Strong Is Yamazaki Baking's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Yamazaki Baking had liabilities of JP¥247.1b due within 12 months and liabilities of JP¥94.5b due beyond that. Offsetting these obligations, it had cash of JP¥139.3b as well as receivables valued at JP¥123.9b due within 12 months. So its liabilities total JP¥78.5b more than the combination of its cash and short-term receivables.
Of course, Yamazaki Baking has a market capitalization of JP¥569.5b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Yamazaki Baking boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that Yamazaki Baking has boosted its EBIT by 85%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Yamazaki Baking can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Yamazaki Baking 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 most recent three years, Yamazaki Baking recorded free cash flow worth 58% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing Up
Although Yamazaki Baking's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of JP¥70.7b. And we liked the look of last year's 85% year-on-year EBIT growth. So we don't think Yamazaki Baking's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Yamazaki Baking, you may well want to click here to check an interactive graph of its earnings per share history.
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.
New: Manage All Your Stock Portfolios in One Place
We've created the ultimate portfolio companion for stock investors, and it's free.
• Connect an unlimited number of Portfolios and see your total in one currency
• Be alerted to new Warning Signs or Risks via email or mobile
• Track the Fair Value of your stocks
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.
About TSE:2212
Yamazaki Baking
Through its subsidiaries, manufactures and sells baked goods in Japan.
Very undervalued with flawless balance sheet.