These 4 Measures Indicate That Uchida Yoko (TSE:8057) Is Using Debt Safely

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Uchida Yoko Co., Ltd. (TSE:8057) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Uchida Yoko

What Is Uchida Yoko's Debt?

The chart below, which you can click on for greater detail, shows that Uchida Yoko had JP¥3.71b in debt in April 2024; about the same as the year before. However, its balance sheet shows it holds JP¥29.8b in cash, so it actually has JP¥26.1b net cash.

How Strong Is Uchida Yoko's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Uchida Yoko had liabilities of JP¥95.2b due within 12 months and liabilities of JP¥11.1b due beyond that. Offsetting this, it had JP¥29.8b in cash and JP¥77.2b in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Uchida Yoko's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the JP¥64.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Uchida Yoko has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Uchida Yoko has increased its EBIT by 7.3% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Uchida Yoko will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Uchida Yoko 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, Uchida Yoko produced sturdy free cash flow equating to 68% 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 Uchida Yoko has JP¥26.1b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥6.7b, being 68% of its EBIT. So is Uchida Yoko's debt a risk? It doesn't seem so to us. Given Uchida Yoko has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com