Kikkoman (TSE:2801) Has A Rock Solid Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Kikkoman Corporation (TSE:2801) makes use of debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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?

The chart below, which you can click on for greater detail, shows that Kikkoman had JP¥17.9b in debt in December 2024; about the same as the year before. But it also has JP¥101.4b in cash to offset that, meaning it has JP¥83.5b net cash.

How Healthy Is Kikkoman's Balance Sheet?

According to the last reported balance sheet, Kikkoman had liabilities of JP¥84.4b due within 12 months, and liabilities of JP¥76.6b due beyond 12 months. On the other hand, it had cash of JP¥101.4b and JP¥92.5b worth of receivables due within a year. So it can boast JP¥32.9b more liquid assets than total liabilities.

This surplus suggests that Kikkoman has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 22% 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. While Kikkoman 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. Over the most recent three years, Kikkoman recorded free cash flow worth 65% 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¥83.5b, as well as more liquid assets than liabilities. And we liked the look of last year's 22% year-on-year EBIT growth. So is Kikkoman'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 Kikkoman'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.

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.