KENKO MayonnaiseLtd (TSE:2915) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that KENKO Mayonnaise Co.,Ltd. (TSE:2915) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for KENKO MayonnaiseLtd

How Much Debt Does KENKO MayonnaiseLtd Carry?

The image below, which you can click on for greater detail, shows that KENKO MayonnaiseLtd had debt of JP¥4.47b at the end of December 2023, a reduction from JP¥5.83b over a year. However, it does have JP¥14.0b in cash offsetting this, leading to net cash of JP¥9.57b.

How Healthy Is KENKO MayonnaiseLtd's Balance Sheet?

According to the last reported balance sheet, KENKO MayonnaiseLtd had liabilities of JP¥22.8b due within 12 months, and liabilities of JP¥6.86b due beyond 12 months. On the other hand, it had cash of JP¥14.0b and JP¥17.9b worth of receivables due within a year. So it actually has JP¥2.23b more liquid assets than total liabilities.

This surplus suggests that KENKO MayonnaiseLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that KENKO MayonnaiseLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, KENKO MayonnaiseLtd grew its EBIT by 180% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine KENKO MayonnaiseLtd's ability to maintain a healthy balance sheet going forward. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. KENKO MayonnaiseLtd 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, KENKO MayonnaiseLtd actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case KENKO MayonnaiseLtd has JP¥9.57b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 218% of that EBIT to free cash flow, bringing in JP¥2.9b. So is KENKO MayonnaiseLtd's debt a risk? It doesn't seem so to us. 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. To that end, you should be aware of the 2 warning signs we've spotted with KENKO MayonnaiseLtd .

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.