Is WorkmanLtd (TSE:7564) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Workman Co.,Ltd. (TSE:7564) makes use of debt. But the real question is whether this debt is making the company risky.

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

Check out our latest analysis for WorkmanLtd

What Is WorkmanLtd's Debt?

The chart below, which you can click on for greater detail, shows that WorkmanLtd had JP¥1.35b in debt in December 2023; about the same as the year before. However, it does have JP¥72.6b in cash offsetting this, leading to net cash of JP¥71.2b.

A Look At WorkmanLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that WorkmanLtd had liabilities of JP¥18.5b due within 12 months and liabilities of JP¥4.58b due beyond that. Offsetting these obligations, it had cash of JP¥72.6b as well as receivables valued at JP¥15.4b due within 12 months. So it actually has JP¥64.9b more liquid assets than total liabilities.

This excess liquidity suggests that WorkmanLtd is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, WorkmanLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, WorkmanLtd saw its EBIT drop by 3.9% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if WorkmanLtd 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While WorkmanLtd 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. In the last three years, WorkmanLtd's free cash flow amounted to 35% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that WorkmanLtd has net cash of JP¥71.2b, as well as more liquid assets than liabilities. So we are not troubled with WorkmanLtd's debt use. 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.