WOLVES HAND (TSE:194A) Has A Pretty Healthy Balance Sheet

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.' 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 WOLVES HAND Co., Ltd. (TSE:194A) does use debt in its business. But should shareholders be worried about its use of debt?

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When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is WOLVES HAND's Net Debt?

You can click the graphic below for the historical numbers, but it shows that WOLVES HAND had JP¥2.53b of debt in June 2025, down from JP¥2.98b, one year before. However, it also had JP¥895.0m in cash, and so its net debt is JP¥1.63b.

How Healthy Is WOLVES HAND's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that WOLVES HAND had liabilities of JP¥1.96b due within 12 months and liabilities of JP¥1.38b due beyond that. Offsetting this, it had JP¥895.0m in cash and JP¥234.0m in receivables that were due within 12 months. So its liabilities total JP¥2.21b more than the combination of its cash and short-term receivables.

Of course, WOLVES HAND has a market capitalization of JP¥11.5b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

Check out our latest analysis for WOLVES HAND

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

WOLVES HAND has a low net debt to EBITDA ratio of only 1.3. And its EBIT covers its interest expense a whopping 36.1 times over. So we're pretty relaxed about its super-conservative use of debt. The good news is that WOLVES HAND has increased its EBIT by 4.8% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since WOLVES HAND will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. In the last three years, WOLVES HAND's free cash flow amounted to 50% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

WOLVES HAND's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And we also thought its net debt to EBITDA was a positive. We would also note that Healthcare industry companies like WOLVES HAND commonly do use debt without problems. Looking at all the aforementioned factors together, it strikes us that WOLVES HAND can handle its debt fairly comfortably. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example WOLVES HAND has 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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.