Is Yamazaki Baking (TSE:2212) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 note that Yamazaki Baking Co., Ltd. (TSE:2212) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See 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 as of December 2024 Yamazaki Baking had JP¥92.7b of debt, an increase on JP¥72.3b, over one year. However, its balance sheet shows it holds JP¥152.4b in cash, so it actually has JP¥59.8b net cash.

How Strong Is Yamazaki Baking's Balance Sheet?

The latest balance sheet data shows that Yamazaki Baking had liabilities of JP¥270.0b due within a year, and liabilities of JP¥134.7b falling due after that. Offsetting this, it had JP¥152.4b in cash and JP¥140.7b in receivables that were due within 12 months. So it has liabilities totalling JP¥111.5b more than its cash and near-term receivables, combined.

Yamazaki Baking has a market capitalization of JP¥533.4b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. 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, Yamazaki Baking also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Yamazaki Baking grew its EBIT by 23% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Yamazaki Baking's ability to maintain a healthy balance sheet going forward. 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. 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 64% 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

While Yamazaki Baking does have more liabilities than liquid assets, it also has net cash of JP¥59.8b. And it impressed us with its EBIT growth of 23% over the last year. So is Yamazaki Baking's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Yamazaki Baking's earnings per share history for free.

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. 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.