These 4 Measures Indicate That Otsuka Holdings (TSE:4578) Is Using Debt Safely

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 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 Otsuka Holdings Co., Ltd. (TSE:4578) does use debt in its business. But should shareholders be worried about its use of debt?

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When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Otsuka Holdings Carry?

As you can see below, Otsuka Holdings had JP¥124.3b of debt at June 2025, down from JP¥166.5b a year prior. However, its balance sheet shows it holds JP¥411.1b in cash, so it actually has JP¥286.9b net cash.

How Strong Is Otsuka Holdings' Balance Sheet?

We can see from the most recent balance sheet that Otsuka Holdings had liabilities of JP¥675.8b falling due within a year, and liabilities of JP¥326.8b due beyond that. Offsetting these obligations, it had cash of JP¥411.1b as well as receivables valued at JP¥504.4b due within 12 months. So it has liabilities totalling JP¥87.1b more than its cash and near-term receivables, combined.

This state of affairs indicates that Otsuka Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the JP¥4.44t company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Otsuka Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Otsuka Holdings

Another good sign is that Otsuka Holdings has been able to increase its EBIT by 21% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Otsuka Holdings 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Otsuka Holdings 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 most recent three years, Otsuka Holdings recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Otsuka Holdings's liabilities, but we can be reassured by the fact it has has net cash of JP¥286.9b. And it impressed us with its EBIT growth of 21% over the last year. So is Otsuka Holdings'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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Otsuka Holdings has 1 warning sign we think you should be aware of.

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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.