We Think YUMEMITSUKETAILtd (TSE:2673) Is Taking Some Risk With Its Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that YUMEMITSUKETAI Co.,Ltd. (TSE:2673) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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When Is Debt Dangerous?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is YUMEMITSUKETAILtd's Debt?

You can click the graphic below for the historical numbers, but it shows that YUMEMITSUKETAILtd had JP¥661.0m of debt in September 2025, down from JP¥695.0m, one year before. However, because it has a cash reserve of JP¥24.0m, its net debt is less, at about JP¥637.0m.

How Strong Is YUMEMITSUKETAILtd's Balance Sheet?

The latest balance sheet data shows that YUMEMITSUKETAILtd had liabilities of JP¥473.0m due within a year, and liabilities of JP¥356.0m falling due after that. On the other hand, it had cash of JP¥24.0m and JP¥18.0m worth of receivables due within a year. So it has liabilities totalling JP¥787.0m more than its cash and near-term receivables, combined.

YUMEMITSUKETAILtd has a market capitalization of JP¥2.30b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.

View our latest analysis for YUMEMITSUKETAILtd

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

YUMEMITSUKETAILtd's debt of just -53.1 times EBITDA is clearly modest. But EBIT was only 0.58 times the interest expense last year, which shows that the debt has negatively impacted the business, by constraining its options (and restricting its free cash flow). Shareholders should be aware that YUMEMITSUKETAILtd's EBIT was down 91% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. The balance sheet is clearly the area to focus on when you are analysing debt. But it is YUMEMITSUKETAILtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last two years, YUMEMITSUKETAILtd actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

While YUMEMITSUKETAILtd's EBIT growth rate has us nervous. To wit both its net debt to EBITDA and conversion of EBIT to free cash flow were encouraging signs. Looking at all the angles mentioned above, it does seem to us that YUMEMITSUKETAILtd is a somewhat risky investment as a result of its debt. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. 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. To that end, you should learn about the 3 warning signs we've spotted with YUMEMITSUKETAILtd (including 1 which is a bit unpleasant) .

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.