Osaka Soda (TSE:4046) Has A Pretty 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.' 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 note that Osaka Soda Co., Ltd. (TSE:4046) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Osaka Soda

How Much Debt Does Osaka Soda Carry?

The chart below, which you can click on for greater detail, shows that Osaka Soda had JP¥7.63b in debt in March 2024; about the same as the year before. But it also has JP¥38.4b in cash to offset that, meaning it has JP¥30.8b net cash.

How Strong Is Osaka Soda's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Osaka Soda had liabilities of JP¥32.9b due within 12 months and liabilities of JP¥7.92b due beyond that. Offsetting these obligations, it had cash of JP¥38.4b as well as receivables valued at JP¥34.8b due within 12 months. So it actually has JP¥32.4b more liquid assets than total liabilities.

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

It is just as well that Osaka Soda's load is not too heavy, because its EBIT was down 33% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Osaka Soda 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Osaka Soda has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Osaka Soda's free cash flow amounted to 39% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Osaka Soda has JP¥30.8b in net cash and a decent-looking balance sheet. So we don't have any problem with Osaka Soda's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Osaka Soda , and understanding them should be part of your investment process.

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.

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