We Think WorkmanLtd (TSE:7564) Can Stay On Top Of Its Debt

Warren Buffett famously said, '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. Importantly, Workman Co.,Ltd. (TSE:7564) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for WorkmanLtd

How Much Debt Does WorkmanLtd Carry?

As you can see below, WorkmanLtd had JP¥1.35b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has JP¥76.7b in cash, leading to a JP¥75.3b net cash position.

How Strong Is WorkmanLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that WorkmanLtd had liabilities of JP¥23.6b due within 12 months and liabilities of JP¥4.65b due beyond that. Offsetting these obligations, it had cash of JP¥76.7b as well as receivables valued at JP¥13.2b due within 12 months. So it actually has JP¥61.6b more liquid assets than total liabilities.

It's good to see that WorkmanLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. 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 3.6% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine WorkmanLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Looking at the most recent three years, WorkmanLtd recorded free cash flow of 37% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that WorkmanLtd has net cash of JP¥75.3b, as well as more liquid assets than liabilities. So we don't have any problem with WorkmanLtd's use of debt. 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.