We Think Ono Pharmaceutical (TSE:4528) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Ono Pharmaceutical Co., Ltd. (TSE:4528) does carry debt. But is this debt a concern to shareholders?

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 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, 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.

See our latest analysis for Ono Pharmaceutical

What Is Ono Pharmaceutical's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Ono Pharmaceutical had debt of JP¥150.0b, up from none in one year. But it also has JP¥150.9b in cash to offset that, meaning it has JP¥918.0m net cash.

How Healthy Is Ono Pharmaceutical's Balance Sheet?

According to the last reported balance sheet, Ono Pharmaceutical had liabilities of JP¥252.7b due within 12 months, and liabilities of JP¥14.5b due beyond 12 months. Offsetting this, it had JP¥150.9b in cash and JP¥150.4b in receivables that were due within 12 months. So it can boast JP¥34.0b 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. Simply put, the fact that Ono Pharmaceutical has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Ono Pharmaceutical saw its EBIT drop by 2.3% 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 ultimately the future profitability of the business will decide if Ono Pharmaceutical can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Ono Pharmaceutical 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. During the last three years, Ono Pharmaceutical produced sturdy free cash flow equating to 67% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Ono Pharmaceutical has JP¥918.0m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 67% of that EBIT to free cash flow, bringing in JP¥105b. So we don't think Ono Pharmaceutical's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Ono Pharmaceutical is showing 1 warning sign in our investment analysis , you should know about...

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.