Ryohin Keikaku (TSE:7453) Has A Rock Solid Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Ryohin Keikaku Co., Ltd. (TSE:7453) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 Ryohin Keikaku

How Much Debt Does Ryohin Keikaku Carry?

As you can see below, Ryohin Keikaku had JP¥45.4b of debt at August 2024, down from JP¥48.5b a year prior. However, its balance sheet shows it holds JP¥125.2b in cash, so it actually has JP¥79.8b net cash.

How Healthy Is Ryohin Keikaku's Balance Sheet?

According to the last reported balance sheet, Ryohin Keikaku had liabilities of JP¥121.0b due within 12 months, and liabilities of JP¥91.5b due beyond 12 months. On the other hand, it had cash of JP¥125.2b and JP¥32.6b worth of receivables due within a year. So it has liabilities totalling JP¥54.7b more than its cash and near-term receivables, combined.

Of course, Ryohin Keikaku has a market capitalization of JP¥872.3b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Ryohin Keikaku also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Ryohin Keikaku grew its EBIT by 69% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Ryohin Keikaku can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Ryohin Keikaku 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, Ryohin Keikaku's free cash flow amounted to 45% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about Ryohin Keikaku's liabilities, but we can be reassured by the fact it has has net cash of JP¥79.8b. And we liked the look of last year's 69% year-on-year EBIT growth. So we don't think Ryohin Keikaku's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Ryohin Keikaku, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.