Is Ono Pharmaceutical (TSE:4528) A Risky Investment?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Ono Pharmaceutical Co., Ltd. (TSE:4528) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Ono Pharmaceutical

How Much Debt Does Ono Pharmaceutical Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Ono Pharmaceutical had debt of JP¥150.0b, up from none in one year. But on the other hand it also has JP¥177.0b in cash, leading to a JP¥27.0b net cash position.

How Strong Is Ono Pharmaceutical's Balance Sheet?

The latest balance sheet data shows that Ono Pharmaceutical had liabilities of JP¥124.7b due within a year, and liabilities of JP¥133.6b falling due after that. On the other hand, it had cash of JP¥177.0b and JP¥137.3b worth of receivables due within a year. So it can boast JP¥56.0b more liquid assets than total liabilities.

This short term liquidity is a sign that Ono Pharmaceutical could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Ono Pharmaceutical boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Ono Pharmaceutical if management cannot prevent a repeat of the 29% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Ono Pharmaceutical'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. Ono Pharmaceutical 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, Ono Pharmaceutical recorded free cash flow worth 67% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Ono Pharmaceutical has net cash of JP¥27.0b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥92b, being 67% of its EBIT. So we are not troubled with Ono Pharmaceutical's debt use. 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 Ono Pharmaceutical .

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.