Yamato Kogyo (TSE:5444) 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.' 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 the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Yamato Kogyo

What Is Yamato Kogyo's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Yamato Kogyo had JP¥3.71b of debt, an increase on none, over one year. However, its balance sheet shows it holds JP¥234.8b in cash, so it actually has JP¥231.1b net cash.

How Healthy Is Yamato Kogyo's Balance Sheet?

The latest balance sheet data shows that Yamato Kogyo had liabilities of JP¥38.7b due within a year, and liabilities of JP¥32.7b falling due after that. Offsetting this, it had JP¥234.8b in cash and JP¥26.9b in receivables that were due within 12 months. So it actually has JP¥190.2b more liquid assets than total liabilities.

This luscious liquidity implies that Yamato Kogyo's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Yamato Kogyo boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Yamato Kogyo's EBIT dived 12%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Yamato Kogyo 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 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¥231.1b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥72b, being 353% of its EBIT. So is Yamato Kogyo's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Yamato Kogyo .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.