Wakou Shokuhin (TSE:2813) Seems To Use Debt Rather Sparingly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that Wakou Shokuhin Co., Ltd. (TSE:2813) does use debt in its business. But is this debt a concern to shareholders?

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What Risk Does Debt Bring?

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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Wakou Shokuhin Carry?

You can click the graphic below for the historical numbers, but it shows that Wakou Shokuhin had JP¥2.17b of debt in December 2024, down from JP¥2.66b, one year before. But on the other hand it also has JP¥2.94b in cash, leading to a JP¥776.0m net cash position.

A Look At Wakou Shokuhin's Liabilities

Zooming in on the latest balance sheet data, we can see that Wakou Shokuhin had liabilities of JP¥4.32b due within 12 months and liabilities of JP¥1.81b due beyond that. Offsetting this, it had JP¥2.94b in cash and JP¥2.82b in receivables that were due within 12 months. So its liabilities total JP¥372.0m more than the combination of its cash and short-term receivables.

Since publicly traded Wakou Shokuhin shares are worth a total of JP¥10.3b, it seems unlikely that this level of liabilities would be a major 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, Wakou Shokuhin also has more cash than debt, so we're pretty confident it can manage its debt safely.

Check out our latest analysis for Wakou Shokuhin

On top of that, Wakou Shokuhin grew its EBIT by 32% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is Wakou Shokuhin's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot .

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Wakou Shokuhin 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, Wakou Shokuhin produced sturdy free cash flow equating to 76% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Wakou Shokuhin has JP¥776.0m in net cash. And it impressed us with its EBIT growth of 32% over the last year. So is Wakou Shokuhin's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Wakou Shokuhin that you should be aware of.

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.

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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.