Does EBARA Foods IndustryInc (TSE:2819) 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that EBARA Foods Industry,Inc. (TSE:2819) does use debt in its business. But the more important question is: how much risk is that debt creating?

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

How Much Debt Does EBARA Foods IndustryInc Carry?

The image below, which you can click on for greater detail, shows that EBARA Foods IndustryInc had debt of JP¥656.0m at the end of December 2024, a reduction from JP¥751.0m over a year. However, its balance sheet shows it holds JP¥11.5b in cash, so it actually has JP¥10.9b net cash.

How Strong Is EBARA Foods IndustryInc's Balance Sheet?

The latest balance sheet data shows that EBARA Foods IndustryInc had liabilities of JP¥11.1b due within a year, and liabilities of JP¥4.62b falling due after that. Offsetting this, it had JP¥11.5b in cash and JP¥14.7b in receivables that were due within 12 months. So it actually has JP¥10.4b more liquid assets than total liabilities.

This surplus liquidity suggests that EBARA Foods IndustryInc's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that EBARA Foods IndustryInc has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for EBARA Foods IndustryInc

On the other hand, EBARA Foods IndustryInc saw its EBIT drop by 7.4% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is EBARA Foods IndustryInc'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. EBARA Foods IndustryInc 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 last three years, EBARA Foods IndustryInc reported free cash flow worth 2.4% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case EBARA Foods IndustryInc has JP¥10.9b in net cash and a decent-looking balance sheet. So we are not troubled with EBARA Foods IndustryInc's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for EBARA Foods IndustryInc you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.