Does Meiji Holdings (TSE:2269) Have A Healthy Balance Sheet?

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. Importantly, Meiji Holdings Co., Ltd. (TSE:2269) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Meiji Holdings

What Is Meiji Holdings's Debt?

The image below, which you can click on for greater detail, shows that Meiji Holdings had debt of JP¥49.9b at the end of March 2024, a reduction from JP¥64.4b over a year. However, its balance sheet shows it holds JP¥106.9b in cash, so it actually has JP¥56.9b net cash.

How Strong Is Meiji Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Meiji Holdings had liabilities of JP¥322.3b due within 12 months and liabilities of JP¥95.2b due beyond that. On the other hand, it had cash of JP¥106.9b and JP¥202.0b worth of receivables due within a year. So it has liabilities totalling JP¥108.6b more than its cash and near-term receivables, combined.

Of course, Meiji Holdings has a market capitalization of JP¥1.01t, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Meiji Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Meiji Holdings grew its EBIT at 12% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Meiji Holdings can strengthen its balance sheet over time. 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. Meiji Holdings 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. Looking at the most recent three years, Meiji Holdings recorded free cash flow of 40% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Meiji Holdings does have more liabilities than liquid assets, it also has net cash of JP¥56.9b. And it also grew its EBIT by 12% over the last year. So we are not troubled with Meiji Holdings's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Meiji Holdings, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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