Is Yakult HonshaLtd (TSE:2267) A Risky Investment?

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

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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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Yakult HonshaLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2025 Yakult HonshaLtd had debt of JP¥97.9b, up from JP¥78.7b in one year. However, it does have JP¥237.6b in cash offsetting this, leading to net cash of JP¥139.7b.

How Strong Is Yakult HonshaLtd's Balance Sheet?

We can see from the most recent balance sheet that Yakult HonshaLtd had liabilities of JP¥159.2b falling due within a year, and liabilities of JP¥74.0b due beyond that. On the other hand, it had cash of JP¥237.6b and JP¥76.3b worth of receivables due within a year. So it actually has JP¥80.8b 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!

View our latest analysis for Yakult HonshaLtd

The modesty of its debt load may become crucial for Yakult HonshaLtd if management cannot prevent a repeat of the 20% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last three years, Yakult HonshaLtd produced sturdy free cash flow equating to 60% 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 it is always sensible to investigate a company's debt, in this case Yakult HonshaLtd has JP¥139.7b in net cash and a decent-looking balance sheet. So we are not troubled with Yakult HonshaLtd's debt use. 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.