Is MATSUDA SANGYO (TSE:7456) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies MATSUDA SANGYO Co., Ltd. (TSE:7456) makes use of debt. But the more important question is: how much risk is that debt creating?

We've discovered 1 warning sign about MATSUDA SANGYO. View them for free.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does MATSUDA SANGYO Carry?

The image below, which you can click on for greater detail, shows that at December 2024 MATSUDA SANGYO had debt of JP¥31.5b, up from JP¥28.3b in one year. However, it does have JP¥14.2b in cash offsetting this, leading to net debt of about JP¥17.4b.

How Healthy Is MATSUDA SANGYO's Balance Sheet?

We can see from the most recent balance sheet that MATSUDA SANGYO had liabilities of JP¥47.6b falling due within a year, and liabilities of JP¥19.4b due beyond that. On the other hand, it had cash of JP¥14.2b and JP¥38.8b worth of receivables due within a year. So it has liabilities totalling JP¥13.9b more than its cash and near-term receivables, combined.

Given MATSUDA SANGYO has a market capitalization of JP¥88.1b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

View our latest analysis for MATSUDA SANGYO

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

MATSUDA SANGYO's net debt is only 1.1 times its EBITDA. And its EBIT covers its interest expense a whopping 49.0 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On top of that, MATSUDA SANGYO grew its EBIT by 36% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine MATSUDA SANGYO's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. Considering the last three years, MATSUDA SANGYO actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Our View

The good news is that MATSUDA SANGYO's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. But the stark truth is that we are concerned by its conversion of EBIT to free cash flow. Looking at all the aforementioned factors together, it strikes us that MATSUDA SANGYO can handle its debt fairly comfortably. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. 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. For example, we've discovered 1 warning sign for MATSUDA SANGYO that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.