Suntory Beverage & Food (TSE:2587) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, '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. We can see that Suntory Beverage & Food Limited (TSE:2587) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Suntory Beverage & Food

What Is Suntory Beverage & Food's Debt?

The image below, which you can click on for greater detail, shows that Suntory Beverage & Food had debt of JP¥74.4b at the end of December 2023, a reduction from JP¥122.7b over a year. However, its balance sheet shows it holds JP¥173.4b in cash, so it actually has JP¥99.0b net cash.

How Strong Is Suntory Beverage & Food's Balance Sheet?

We can see from the most recent balance sheet that Suntory Beverage & Food had liabilities of JP¥535.7b falling due within a year, and liabilities of JP¥191.7b due beyond that. On the other hand, it had cash of JP¥173.4b and JP¥309.9b worth of receivables due within a year. So it has liabilities totalling JP¥244.0b more than its cash and near-term receivables, combined.

Of course, Suntory Beverage & Food has a market capitalization of JP¥1.48t, 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. While it does have liabilities worth noting, Suntory Beverage & Food also has more cash than debt, so we're pretty confident it can manage its debt safely.

The good news is that Suntory Beverage & Food has increased its EBIT by 5.8% over twelve months, which should ease any concerns about debt repayment. 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 Suntory Beverage & Food'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 Suntory Beverage & Food 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, Suntory Beverage & Food produced sturdy free cash flow equating to 67% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While Suntory Beverage & Food does have more liabilities than liquid assets, it also has net cash of JP¥99.0b. The cherry on top was that in converted 67% of that EBIT to free cash flow, bringing in JP¥79b. So is Suntory Beverage & Food'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 Suntory Beverage & Food's earnings per share history for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.