WorkmanLtd (TYO:7564) Could Easily Take On More Debt

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. Importantly, Workman Co.,Ltd. (TYO:7564) 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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for WorkmanLtd

What Is WorkmanLtd's Net Debt?

The image below, which you can click on for greater detail, shows that WorkmanLtd had debt of JP¥248.0m at the end of September 2020, a reduction from JP¥1.35b over a year. However, it does have JP¥43.6b in cash offsetting this, leading to net cash of JP¥43.3b.

How Healthy Is WorkmanLtd's Balance Sheet?

The latest balance sheet data shows that WorkmanLtd had liabilities of JP¥16.0b due within a year, and liabilities of JP¥3.14b falling due after that. Offsetting these obligations, it had cash of JP¥43.6b as well as receivables valued at JP¥13.5b due within 12 months. So it can boast JP¥38.0b more liquid assets than total liabilities.

This surplus suggests that WorkmanLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that WorkmanLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that WorkmanLtd has been able to increase its EBIT by 30% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is WorkmanLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. WorkmanLtd 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, WorkmanLtd's free cash flow amounted to 44% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case WorkmanLtd has JP¥43.3b in net cash and a decent-looking balance sheet. And we liked the look of last year's 30% year-on-year EBIT growth. So is WorkmanLtd's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of WorkmanLtd's earnings per share history for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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