Here's Why Yamato Kogyo (TSE:5444) Can Manage Its Debt Responsibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 can see that Yamato Kogyo Co., Ltd. (TSE:5444) does use debt in its business. But is this debt a concern to shareholders?

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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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Yamato Kogyo Carry?

You can click the graphic below for the historical numbers, but it shows that Yamato Kogyo had JP¥1.53b of debt in June 2025, down from JP¥3.71b, one year before. But it also has JP¥226.5b in cash to offset that, meaning it has JP¥225.0b net cash.

How Healthy Is Yamato Kogyo's Balance Sheet?

According to the last reported balance sheet, Yamato Kogyo had liabilities of JP¥27.6b due within 12 months, and liabilities of JP¥28.6b due beyond 12 months. Offsetting these obligations, it had cash of JP¥226.5b as well as receivables valued at JP¥31.0b due within 12 months. So it actually has JP¥201.2b more liquid assets than total liabilities.

This surplus liquidity suggests that Yamato Kogyo's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Yamato Kogyo has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Yamato Kogyo

The modesty of its debt load may become crucial for Yamato Kogyo if management cannot prevent a repeat of the 25% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Yamato Kogyo'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Yamato Kogyo 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. Over the last three years, Yamato Kogyo actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Yamato Kogyo has net cash of JP¥225.0b, as well as more liquid assets than liabilities. The cherry on top was that in converted 430% of that EBIT to free cash flow, bringing in JP¥41b. So is Yamato Kogyo's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 2 warning signs for Yamato Kogyo that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.