Does Shiseido Company (TSE:4911) Have A 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.' 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 Shiseido Company, Limited (TSE:4911) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Shiseido Company

What Is Shiseido Company's Net Debt?

As you can see below, at the end of September 2024, Shiseido Company had JP¥214.6b of debt, up from JP¥170.0b a year ago. Click the image for more detail. On the flip side, it has JP¥85.0b in cash leading to net debt of about JP¥129.6b.

How Strong Is Shiseido Company's Balance Sheet?

We can see from the most recent balance sheet that Shiseido Company had liabilities of JP¥411.9b falling due within a year, and liabilities of JP¥238.8b due beyond that. Offsetting these obligations, it had cash of JP¥85.0b as well as receivables valued at JP¥135.6b due within 12 months. So it has liabilities totalling JP¥430.1b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Shiseido Company has a market capitalization of JP¥1.06t, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 Shiseido Company'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.

Over 12 months, Shiseido Company made a loss at the EBIT level, and saw its revenue drop to JP¥973b, which is a fall of 5.2%. We would much prefer see growth.

Caveat Emptor

Importantly, Shiseido Company had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at JP¥5.7b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Surprisingly, we note that it actually reported positive free cash flow of JP¥19b and a profit of JP¥2.0b. So one might argue that there's still a chance it can get things on the right track. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Shiseido Company (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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.