These 4 Measures Indicate That Unicharm (TSE:8113) Is Using Debt Safely

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. We can see that Unicharm Corporation (TSE:8113) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Unicharm

What Is Unicharm's Debt?

The image below, which you can click on for greater detail, shows that Unicharm had debt of JP¥27.1b at the end of June 2024, a reduction from JP¥34.8b over a year. However, it does have JP¥229.3b in cash offsetting this, leading to net cash of JP¥202.2b.

A Look At Unicharm's Liabilities

According to the last reported balance sheet, Unicharm had liabilities of JP¥303.1b due within 12 months, and liabilities of JP¥72.1b due beyond 12 months. Offsetting these obligations, it had cash of JP¥229.3b as well as receivables valued at JP¥174.3b due within 12 months. So it can boast JP¥28.5b more liquid assets than total liabilities.

Having regard to Unicharm's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the JP¥2.98t company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Unicharm boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Unicharm grew its EBIT by 20% last year, making its debt load easier 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 Unicharm 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Unicharm 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, Unicharm recorded free cash flow worth 67% 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

While we empathize with investors who find debt concerning, you should keep in mind that Unicharm has net cash of JP¥202.2b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 20% over the last year. So is Unicharm'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 Unicharm, you may well want to click here to check an interactive graph of its earnings per share history.

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.

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

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.