These 4 Measures Indicate That WorkmanLtd (TSE:7564) Is Using Debt Reasonably Well

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 more important question is: how much risk is that debt creating?

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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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is WorkmanLtd's Net Debt?

As you can see below, WorkmanLtd had JP¥1.35b of debt, at December 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has JP¥88.7b in cash to offset that, meaning it has JP¥87.3b net cash.

How Strong Is WorkmanLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that WorkmanLtd had liabilities of JP¥21.5b due within 12 months and liabilities of JP¥4.75b due beyond that. Offsetting this, it had JP¥88.7b in cash and JP¥12.5b in receivables that were due within 12 months. So it can boast JP¥74.9b more liquid assets than total liabilities.

This excess liquidity suggests that WorkmanLtd is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that WorkmanLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for WorkmanLtd

But the other side of the story is that WorkmanLtd saw its EBIT decline by 3.7% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. 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 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. During the last three years, WorkmanLtd produced sturdy free cash flow equating to 52% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case WorkmanLtd has JP¥87.3b in net cash and a decent-looking balance sheet. So is WorkmanLtd's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in WorkmanLtd, you may well want to click here to check an interactive graph of its earnings per share history.

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.