Does Kikkoman (TSE:2801) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Kikkoman Corporation (TSE:2801) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Kikkoman

What Is Kikkoman's Net Debt?

As you can see below, Kikkoman had JP¥17.8b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has JP¥118.8b in cash, leading to a JP¥101.0b net cash position.

How Healthy Is Kikkoman's Balance Sheet?

According to the last reported balance sheet, Kikkoman had liabilities of JP¥82.7b due within 12 months, and liabilities of JP¥73.3b due beyond 12 months. Offsetting these obligations, it had cash of JP¥118.8b as well as receivables valued at JP¥80.1b due within 12 months. So it actually has JP¥42.9b more liquid assets than total liabilities.

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

Another good sign is that Kikkoman has been able to increase its EBIT by 28% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Kikkoman 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Kikkoman 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, Kikkoman recorded free cash flow worth 64% 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

While we empathize with investors who find debt concerning, you should keep in mind that Kikkoman has net cash of JP¥101.0b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 28% over the last year. So we don't think Kikkoman's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Kikkoman, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.