Yamazaki Baking (TSE:2212) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Yamazaki Baking Co., Ltd. (TSE:2212) does carry debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Yamazaki Baking

How Much Debt Does Yamazaki Baking Carry?

The image below, which you can click on for greater detail, shows that Yamazaki Baking had debt of JP¥72.3b at the end of December 2023, a reduction from JP¥78.6b over a year. However, it does have JP¥134.9b in cash offsetting this, leading to net cash of JP¥62.6b.

A Look At Yamazaki Baking's Liabilities

According to the last reported balance sheet, Yamazaki Baking had liabilities of JP¥257.9b due within 12 months, and liabilities of JP¥98.0b due beyond 12 months. Offsetting this, it had JP¥134.9b in cash and JP¥134.8b in receivables that were due within 12 months. So its liabilities total JP¥86.2b more than the combination of its cash and short-term receivables.

Given Yamazaki Baking has a market capitalization of JP¥719.2b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

On top of that, Yamazaki Baking grew its EBIT by 90% 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 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. While Yamazaki Baking 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 most recent three years, Yamazaki Baking recorded free cash flow worth 77% 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¥62.6b. And it impressed us with its EBIT growth of 90% over the last year. So we don't think Yamazaki Baking'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 instance, we've identified 1 warning sign for Yamazaki Baking that you should be aware of.

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.

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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.