Kikkoman (TSE:2801) Seems To Use Debt Rather Sparingly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that Kikkoman Corporation (TSE:2801) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Kikkoman

What Is Kikkoman's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Kikkoman had debt of JP¥18.2b, up from JP¥17.5b in one year. But on the other hand it also has JP¥150.8b in cash, leading to a JP¥132.6b net cash position.

A Look At Kikkoman's Liabilities

According to the last reported balance sheet, Kikkoman had liabilities of JP¥95.1b due within 12 months, and liabilities of JP¥74.6b due beyond 12 months. Offsetting this, it had JP¥150.8b in cash and JP¥83.8b in receivables that were due within 12 months. So it can boast JP¥65.0b 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. Simply put, the fact that Kikkoman has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that Kikkoman has been able to increase its EBIT by 20% 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 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¥132.6b, as well as more liquid assets than liabilities. And we liked the look of last year's 20% year-on-year EBIT growth. So is Kikkoman's debt a risk? It doesn't seem so to us. 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.

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