These 4 Measures Indicate That Life (TSE:8194) Is Using Debt Reasonably Well

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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Life Corporation (TSE:8194) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Life Carry?

You can click the graphic below for the historical numbers, but it shows that Life had JP¥36.3b of debt in May 2025, down from JP¥49.2b, one year before. However, it also had JP¥25.8b in cash, and so its net debt is JP¥10.5b.

How Strong Is Life's Balance Sheet?

We can see from the most recent balance sheet that Life had liabilities of JP¥141.3b falling due within a year, and liabilities of JP¥38.1b due beyond that. Offsetting this, it had JP¥25.8b in cash and JP¥51.5b in receivables that were due within 12 months. So it has liabilities totalling JP¥102.0b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Life has a market capitalization of JP¥212.7b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

See our latest analysis for Life

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Life's net debt is only 0.25 times its EBITDA. And its EBIT easily covers its interest expense, being 290 times the size. So we're pretty relaxed about its super-conservative use of debt. The good news is that Life has increased its EBIT by 5.6% over twelve months, which should ease any concerns about debt repayment. 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 Life'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the most recent three years, Life recorded free cash flow worth 68% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Life's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But, on a more sombre note, we are a little concerned by its level of total liabilities. When we consider the range of factors above, it looks like Life is pretty sensible with its use of debt. While that brings some risk, it can also enhance returns for shareholders. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Life you should know about.

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