These 4 Measures Indicate That Ohki Healthcare HoldingsLtd (TSE:3417) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Ohki Healthcare Holdings Co.,Ltd. (TSE:3417) makes use of debt. But the more important question is: how much risk is that debt creating?

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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Ohki Healthcare HoldingsLtd

What Is Ohki Healthcare HoldingsLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that Ohki Healthcare HoldingsLtd had JP¥6.95b of debt in March 2024, down from JP¥8.46b, one year before. However, its balance sheet shows it holds JP¥8.31b in cash, so it actually has JP¥1.36b net cash.

How Healthy Is Ohki Healthcare HoldingsLtd's Balance Sheet?

According to the last reported balance sheet, Ohki Healthcare HoldingsLtd had liabilities of JP¥106.4b due within 12 months, and liabilities of JP¥4.29b due beyond 12 months. Offsetting these obligations, it had cash of JP¥8.31b as well as receivables valued at JP¥82.4b due within 12 months. So it has liabilities totalling JP¥20.0b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the JP¥11.2b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Ohki Healthcare HoldingsLtd would probably need a major re-capitalization if its creditors were to demand repayment. Ohki Healthcare HoldingsLtd boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

While Ohki Healthcare HoldingsLtd doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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 Ohki Healthcare HoldingsLtd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Ohki Healthcare HoldingsLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Ohki Healthcare HoldingsLtd 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.

Summing Up

While Ohki Healthcare HoldingsLtd does have more liabilities than liquid assets, it also has net cash of JP¥1.36b. The cherry on top was that in converted 173% of that EBIT to free cash flow, bringing in JP¥7.2b. So we don't have any problem with Ohki Healthcare HoldingsLtd's use of debt. 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 example Ohki Healthcare HoldingsLtd has 2 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com