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

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. As with many other companies Yakult Honsha Co.,Ltd. (TSE:2267) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Yakult HonshaLtd

What Is Yakult HonshaLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Yakult HonshaLtd had debt of JP¥84.9b, up from JP¥66.0b in one year. However, it does have JP¥255.3b in cash offsetting this, leading to net cash of JP¥170.4b.

A Look At Yakult HonshaLtd's Liabilities

The latest balance sheet data shows that Yakult HonshaLtd had liabilities of JP¥145.6b due within a year, and liabilities of JP¥81.8b falling due after that. Offsetting this, it had JP¥255.3b in cash and JP¥60.5b in receivables that were due within 12 months. So it actually has JP¥88.4b more liquid assets than total liabilities.

This short term liquidity is a sign that Yakult HonshaLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Yakult HonshaLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Yakult HonshaLtd saw its EBIT decline by 4.0% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. 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. While Yakult HonshaLtd 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, Yakult HonshaLtd recorded free cash flow worth 70% 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 we empathize with investors who find debt concerning, you should keep in mind that Yakult HonshaLtd has net cash of JP¥170.4b, as well as more liquid assets than liabilities. The cherry on top was that in converted 70% of that EBIT to free cash flow, bringing in JP¥24b. So is Yakult HonshaLtd'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 Yakult HonshaLtd's earnings per share history for free.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com