Is Yamato Holdings (TSE:9064) Using Too Much Debt?

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. Importantly, Yamato Holdings Co., Ltd. (TSE:9064) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Yamato Holdings

How Much Debt Does Yamato Holdings Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Yamato Holdings had debt of JP¥41.0b, up from JP¥15.0b in one year. But on the other hand it also has JP¥166.2b in cash, leading to a JP¥125.2b net cash position.

How Strong Is Yamato Holdings' Balance Sheet?

The latest balance sheet data shows that Yamato Holdings had liabilities of JP¥340.2b due within a year, and liabilities of JP¥200.5b falling due after that. Offsetting these obligations, it had cash of JP¥166.2b as well as receivables valued at JP¥266.4b due within 12 months. So it has liabilities totalling JP¥108.2b more than its cash and near-term receivables, combined.

Given Yamato Holdings has a market capitalization of JP¥583.5b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Yamato Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Yamato Holdings's saving grace is its low debt levels, because its EBIT has tanked 59% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Yamato Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Yamato Holdings 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, Yamato Holdings produced sturdy free cash flow equating to 62% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While Yamato Holdings does have more liabilities than liquid assets, it also has net cash of JP¥125.2b. So we don't have any problem with Yamato Holdings's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with Yamato Holdings .

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.