Does Rohto PharmaceuticalLtd (TSE:4527) Have A Healthy Balance Sheet?

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. We can see that Rohto Pharmaceutical Co.,Ltd. (TSE:4527) does use debt in its business. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

See our latest analysis for Rohto PharmaceuticalLtd

How Much Debt Does Rohto PharmaceuticalLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Rohto PharmaceuticalLtd had JP¥10.5b of debt in March 2024, down from JP¥11.7b, one year before. However, it does have JP¥89.2b in cash offsetting this, leading to net cash of JP¥78.7b.

How Healthy Is Rohto PharmaceuticalLtd's Balance Sheet?

The latest balance sheet data shows that Rohto PharmaceuticalLtd had liabilities of JP¥87.1b due within a year, and liabilities of JP¥12.1b falling due after that. Offsetting this, it had JP¥89.2b in cash and JP¥69.1b in receivables that were due within 12 months. So it actually has JP¥59.2b more liquid assets than total liabilities.

This short term liquidity is a sign that Rohto PharmaceuticalLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Rohto PharmaceuticalLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Rohto PharmaceuticalLtd grew its EBIT at 20% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Rohto PharmaceuticalLtd'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Rohto PharmaceuticalLtd 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. During the last three years, Rohto PharmaceuticalLtd produced sturdy free cash flow equating to 61% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Rohto PharmaceuticalLtd has JP¥78.7b in net cash and a decent-looking balance sheet. And we liked the look of last year's 20% year-on-year EBIT growth. So is Rohto PharmaceuticalLtd's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Rohto PharmaceuticalLtd, you may well want to click here to check an interactive graph of its earnings per share history.

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