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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Suntory Beverage & Food Limited (TSE:2587) makes use of debt. But should shareholders be worried about its use of debt?

The end of cancer? These 15 emerging AI stocks are developing tech that will allow early identification of life changing diseases like cancer and Alzheimer's.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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 think about a company's use of debt, we first look at cash and debt together.

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¥27.2b at the end of December 2024, a reduction from JP¥74.4b over a year. However, its balance sheet shows it holds JP¥165.1b in cash, so it actually has JP¥137.8b 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¥544.2b falling due within a year, and liabilities of JP¥198.6b due beyond that. Offsetting these obligations, it had cash of JP¥165.1b as well as receivables valued at JP¥341.0b due within 12 months. So it has liabilities totalling JP¥236.7b more than its cash and near-term receivables, combined.

Given Suntory Beverage & Food has a humongous market capitalization of JP¥1.54t, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

See our latest analysis for Suntory Beverage & Food

The good news is that Suntory Beverage & Food has increased its EBIT by 9.9% 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 ultimately the future profitability of the business will decide if Suntory Beverage & Food can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Suntory Beverage & Food 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. Over the most recent three years, Suntory Beverage & Food recorded free cash flow worth 58% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

Although Suntory Beverage & Food's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of JP¥137.8b. 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.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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

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.