These 4 Measures Indicate That Yoshimura Food Holdings K.K (TSE:2884) Is Using Debt Reasonably Well

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 Yoshimura Food Holdings K.K. (TSE:2884) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Yoshimura Food Holdings K.K

What Is Yoshimura Food Holdings K.K's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of February 2024 Yoshimura Food Holdings K.K had JP¥31.6b of debt, an increase on JP¥14.9b, over one year. However, it also had JP¥10.2b in cash, and so its net debt is JP¥21.4b.

How Strong Is Yoshimura Food Holdings K.K's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Yoshimura Food Holdings K.K had liabilities of JP¥25.0b due within 12 months and liabilities of JP¥14.7b due beyond that. Offsetting this, it had JP¥10.2b in cash and JP¥6.97b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥22.5b.

Yoshimura Food Holdings K.K has a market capitalization of JP¥39.0b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Strangely Yoshimura Food Holdings K.K has a sky high EBITDA ratio of 5.2, implying high debt, but a strong interest coverage of 12.9. This means that unless the company has access to very cheap debt, that interest expense will likely grow in the future. Notably, Yoshimura Food Holdings K.K's EBIT launched higher than Elon Musk, gaining a whopping 258% on last year. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Yoshimura Food Holdings K.K can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. Happily for any shareholders, Yoshimura Food Holdings K.K actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

Happily, Yoshimura Food Holdings K.K's impressive interest cover implies it has the upper hand on its debt. But we must concede we find its net debt to EBITDA has the opposite effect. When we consider the range of factors above, it looks like Yoshimura Food Holdings K.K is pretty sensible with its use of debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Yoshimura Food Holdings K.K you should be aware of, and 1 of them can't be ignored.

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.

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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.