Does Yokogawa Electric (TSE:6841) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Yokogawa Electric Corporation (TSE:6841) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Yokogawa Electric

How Much Debt Does Yokogawa Electric Carry?

As you can see below, Yokogawa Electric had JP¥24.2b of debt, at June 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¥145.8b in cash, leading to a JP¥121.6b net cash position.

How Healthy Is Yokogawa Electric's Balance Sheet?

According to the last reported balance sheet, Yokogawa Electric had liabilities of JP¥189.2b due within 12 months, and liabilities of JP¥43.3b due beyond 12 months. On the other hand, it had cash of JP¥145.8b and JP¥236.3b worth of receivables due within a year. So it can boast JP¥149.6b more liquid assets than total liabilities.

It's good to see that Yokogawa Electric 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, Yokogawa Electric boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Yokogawa Electric has boosted its EBIT by 43%, thus reducing the spectre of future debt repayments. 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 Yokogawa Electric 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Yokogawa Electric 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, Yokogawa Electric produced sturdy free cash flow equating to 55% 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 we empathize with investors who find debt concerning, you should keep in mind that Yokogawa Electric has net cash of JP¥121.6b, as well as more liquid assets than liabilities. And we liked the look of last year's 43% year-on-year EBIT growth. So is Yokogawa Electric's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Yokogawa Electric that you should be aware of before investing here.

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.