These 4 Measures Indicate That Calbee (TSE:2229) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Calbee, Inc. (TSE:2229) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Calbee

How Much Debt Does Calbee Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Calbee had JP¥26.4b of debt, an increase on JP¥1.29b, over one year. But on the other hand it also has JP¥44.3b in cash, leading to a JP¥17.9b net cash position.

A Look At Calbee's Liabilities

The latest balance sheet data shows that Calbee had liabilities of JP¥54.5b due within a year, and liabilities of JP¥36.6b falling due after that. On the other hand, it had cash of JP¥44.3b and JP¥54.0b worth of receivables due within a year. So it can boast JP¥7.26b more liquid assets than total liabilities.

This state of affairs indicates that Calbee's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the JP¥395.8b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Calbee boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Calbee 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 ultimately the future profitability of the business will decide if Calbee 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 Calbee 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. Considering the last three years, Calbee actually recorded a cash outflow, overall. 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 we empathize with investors who find debt concerning, you should keep in mind that Calbee has net cash of JP¥17.9b, as well as more liquid assets than liabilities. And we liked the look of last year's 23% year-on-year EBIT growth. So we are not troubled with Calbee's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Calbee .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.