Asahi Yukizai (TSE:4216) Seems To Use Debt Quite Sensibly

Simply Wall St · 4d ago

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Asahi Yukizai Corporation (TSE:4216) does have debt on its balance sheet. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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 examine debt levels, we first consider both cash and debt levels, together.

What Is Asahi Yukizai's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Asahi Yukizai had JP¥6.05b of debt, an increase on JP¥4.20b, over one year. But it also has JP¥20.4b in cash to offset that, meaning it has JP¥14.3b net cash.

debt-equity-history-analysis
TSE:4216 Debt to Equity History April 15th 2025

How Healthy Is Asahi Yukizai's Balance Sheet?

According to the last reported balance sheet, Asahi Yukizai had liabilities of JP¥20.2b due within 12 months, and liabilities of JP¥7.70b due beyond 12 months. On the other hand, it had cash of JP¥20.4b and JP¥17.0b worth of receivables due within a year. So it can boast JP¥9.48b more liquid assets than total liabilities.

This surplus suggests that Asahi Yukizai has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Asahi Yukizai boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Asahi Yukizai

In fact Asahi Yukizai's saving grace is its low debt levels, because its EBIT has tanked 26% 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Asahi Yukizai can strengthen its balance sheet over time. 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 company can only pay off debt with cold hard cash, not accounting profits. Asahi Yukizai 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. In the last three years, Asahi Yukizai's free cash flow amounted to 29% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Asahi Yukizai has JP¥14.3b in net cash and a decent-looking balance sheet. So we don't have any problem with Asahi Yukizai's use of debt. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Asahi Yukizai's dividend history, without delay!

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.