These 4 Measures Indicate That Rohto PharmaceuticalLtd (TSE:4527) Is Using Debt Reasonably Well

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Rohto Pharmaceutical Co.,Ltd. (TSE:4527) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Rohto PharmaceuticalLtd

What Is Rohto PharmaceuticalLtd's Debt?

As you can see below, at the end of June 2024, Rohto PharmaceuticalLtd had JP¥45.9b of debt, up from JP¥11.1b a year ago. Click the image for more detail. However, its balance sheet shows it holds JP¥73.6b in cash, so it actually has JP¥27.8b net cash.

A Look At Rohto PharmaceuticalLtd's Liabilities

According to the last reported balance sheet, Rohto PharmaceuticalLtd had liabilities of JP¥119.5b due within 12 months, and liabilities of JP¥31.9b due beyond 12 months. Offsetting these obligations, it had cash of JP¥73.6b as well as receivables valued at JP¥67.5b due within 12 months. So its liabilities total JP¥10.3b more than the combination of its cash and short-term receivables.

Having regard to Rohto PharmaceuticalLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the JP¥796.2b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Rohto PharmaceuticalLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, Rohto PharmaceuticalLtd grew its EBIT by 9.5% in the last year, making that debt load look even more manageable. 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 Rohto PharmaceuticalLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the most recent three years, Rohto PharmaceuticalLtd recorded free cash flow worth 57% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Rohto PharmaceuticalLtd's liabilities, but we can be reassured by the fact it has has net cash of JP¥27.8b. 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.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.