Unicharm (TSE:8113) Could Easily Take On More Debt

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. Importantly, Unicharm Corporation (TSE:8113) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Unicharm's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Unicharm had JP¥26.9b of debt in December 2024, down from JP¥28.6b, one year before. But on the other hand it also has JP¥261.1b in cash, leading to a JP¥234.2b net cash position.

How Healthy Is Unicharm's Balance Sheet?

According to the last reported balance sheet, Unicharm had liabilities of JP¥301.6b due within 12 months, and liabilities of JP¥64.7b due beyond 12 months. Offsetting this, it had JP¥261.1b in cash and JP¥168.6b in receivables that were due within 12 months. So it can boast JP¥63.4b more liquid assets than total liabilities.

This surplus suggests that Unicharm has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Unicharm boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Unicharm

Fortunately, Unicharm grew its EBIT by 2.7% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Unicharm'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. 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 72% 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 it is always sensible to investigate a company's debt, in this case Unicharm has JP¥234.2b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 72% of that EBIT to free cash flow, bringing in JP¥98b. 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.

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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.