Here's Why Yakult HonshaLtd (TSE:2267) Can Manage Its Debt Responsibly

Warren Buffett famously said, '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 Yakult Honsha Co.,Ltd. (TSE:2267) does use debt in its business. But the more important question is: how much risk is that debt creating?

We check all companies for important risks. See what we found for Yakult HonshaLtd in our free report.

When Is Debt Dangerous?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Yakult HonshaLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Yakult HonshaLtd had JP¥79.8b of debt, an increase on JP¥66.3b, over one year. But on the other hand it also has JP¥262.4b in cash, leading to a JP¥182.6b net cash position.

A Look At Yakult HonshaLtd's Liabilities

According to the last reported balance sheet, Yakult HonshaLtd had liabilities of JP¥150.5b due within 12 months, and liabilities of JP¥75.6b due beyond 12 months. Offsetting these obligations, it had cash of JP¥262.4b as well as receivables valued at JP¥62.6b due within 12 months. So it actually has JP¥98.9b more liquid assets than total liabilities.

This surplus suggests that Yakult HonshaLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Yakult HonshaLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Yakult HonshaLtd

But the other side of the story is that Yakult HonshaLtd saw its EBIT decline by 8.5% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. 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 Yakult HonshaLtd's ability to maintain a healthy balance sheet going forward. 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. Yakult HonshaLtd 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. During the last three years, Yakult HonshaLtd produced sturdy free cash flow equating to 64% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Yakult HonshaLtd has net cash of JP¥182.6b, as well as more liquid assets than liabilities. So we don't think Yakult HonshaLtd's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Yakult HonshaLtd, you may well want to click here to check an interactive graph of its earnings per share history.

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.