Does Alfresa Holdings (TSE:2784) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Alfresa Holdings Corporation (TSE:2784) does use debt in its business. But the real question is whether this debt is making the company risky.

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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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Alfresa Holdings's Debt?

As you can see below, Alfresa Holdings had JP¥30.6b of debt, at June 2025, which is about the same as the year before. You can click the chart for greater detail. But it also has JP¥180.6b in cash to offset that, meaning it has JP¥150.0b net cash.

A Look At Alfresa Holdings' Liabilities

We can see from the most recent balance sheet that Alfresa Holdings had liabilities of JP¥938.5b falling due within a year, and liabilities of JP¥61.4b due beyond that. On the other hand, it had cash of JP¥180.6b and JP¥678.2b worth of receivables due within a year. So its liabilities total JP¥141.1b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Alfresa Holdings is worth JP¥381.7b, and thus could probably raise enough capital to shore up 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. Despite its noteworthy liabilities, Alfresa Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Alfresa Holdings

On the other hand, Alfresa Holdings saw its EBIT drop by 2.4% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Alfresa Holdings 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Alfresa Holdings 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. In the last three years, Alfresa Holdings's free cash flow amounted to 39% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While Alfresa Holdings does have more liabilities than liquid assets, it also has net cash of JP¥150.0b. So we are not troubled with Alfresa Holdings's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Alfresa Holdings that you should be aware of.

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.