Here's Why Suntory Beverage & Food (TSE:2587) Can Manage Its Debt Responsibly

Simply Wall St · 10/14 23:10

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. We note that Suntory Beverage & Food Limited (TSE:2587) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Suntory Beverage & Food

What Is Suntory Beverage & Food's Net Debt?

The image below, which you can click on for greater detail, shows that Suntory Beverage & Food had debt of JP¥74.7b at the end of June 2024, a reduction from JP¥116.0b over a year. However, its balance sheet shows it holds JP¥155.1b in cash, so it actually has JP¥80.4b net cash.

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TSE:2587 Debt to Equity History October 14th 2024

How Healthy Is Suntory Beverage & Food's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Suntory Beverage & Food had liabilities of JP¥578.1b due within 12 months and liabilities of JP¥220.7b due beyond that. On the other hand, it had cash of JP¥155.1b and JP¥374.1b worth of receivables due within a year. So it has liabilities totalling JP¥269.7b more than its cash and near-term receivables, combined.

Of course, Suntory Beverage & Food has a titanic market capitalization of JP¥1.62t, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Suntory Beverage & Food boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Suntory Beverage & Food has been able to increase its EBIT by 29% in twelve months, making it easier to pay down debt. 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 Suntory Beverage & Food'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Suntory Beverage & Food 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. Looking at the most recent three years, Suntory Beverage & Food recorded free cash flow of 46% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Suntory Beverage & Food does have more liabilities than liquid assets, it also has net cash of JP¥80.4b. And it impressed us with its EBIT growth of 29% over the last year. So is Suntory Beverage & Food'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 Suntory Beverage & Food, 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.