Yodogawa Steel Works (TSE:5451) Seems To Use Debt Quite Sensibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Yodogawa Steel Works, Ltd. (TSE:5451) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Yodogawa Steel Works

How Much Debt Does Yodogawa Steel Works Carry?

The image below, which you can click on for greater detail, shows that Yodogawa Steel Works had debt of JP¥544.0m at the end of March 2024, a reduction from JP¥1.33b over a year. However, it does have JP¥60.8b in cash offsetting this, leading to net cash of JP¥60.3b.

How Strong Is Yodogawa Steel Works' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Yodogawa Steel Works had liabilities of JP¥28.1b due within 12 months and liabilities of JP¥23.9b due beyond that. Offsetting this, it had JP¥60.8b in cash and JP¥50.1b in receivables that were due within 12 months. So it can boast JP¥58.9b more liquid assets than total liabilities.

This excess liquidity is a great indication that Yodogawa Steel Works' balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Yodogawa Steel Works boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Yodogawa Steel Works saw its EBIT drop by 5.1% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Yodogawa Steel Works will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Yodogawa Steel Works 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. In the last three years, Yodogawa Steel Works's free cash flow amounted to 24% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Yodogawa Steel Works has net cash of JP¥60.3b, as well as more liquid assets than liabilities. So we don't have any problem with Yodogawa Steel Works's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Yodogawa Steel Works you should be aware of.

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