Leopalace21 (TSE:8848) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Leopalace21 Corporation (TSE:8848) makes use of debt. But should shareholders be worried about its use of debt?

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Leopalace21's Debt?

The chart below, which you can click on for greater detail, shows that Leopalace21 had JP¥30.0b in debt in March 2025; about the same as the year before. But it also has JP¥88.5b in cash to offset that, meaning it has JP¥58.5b net cash.

A Look At Leopalace21's Liabilities

Zooming in on the latest balance sheet data, we can see that Leopalace21 had liabilities of JP¥95.3b due within 12 months and liabilities of JP¥33.0b due beyond that. Offsetting this, it had JP¥88.5b in cash and JP¥6.78b in receivables that were due within 12 months. So its liabilities total JP¥33.1b more than the combination of its cash and short-term receivables.

Of course, Leopalace21 has a market capitalization of JP¥195.1b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Leopalace21 also has more cash than debt, so we're pretty confident it can manage its debt safely.

See our latest analysis for Leopalace21

Also positive, Leopalace21 grew its EBIT by 25% in the last year, and that should make it easier to pay down debt, going forward. 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 Leopalace21'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Leopalace21 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, Leopalace21 recorded free cash flow worth a fulsome 90% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

Although Leopalace21's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of JP¥58.5b. The cherry on top was that in converted 90% of that EBIT to free cash flow, bringing in JP¥25b. So we don't think Leopalace21's use of debt is risky. 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 2 warning signs we've spotted with Leopalace21 .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.