Here's Why ZOZO (TSE:3092) Can Manage Its Debt Responsibly

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.' 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. Importantly, ZOZO, Inc. (TSE:3092) does carry debt. But the more important question is: how much risk is that debt creating?

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When Is Debt A Problem?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is ZOZO's Debt?

The chart below, which you can click on for greater detail, shows that ZOZO had JP¥20.0b in debt in September 2025; about the same as the year before. But it also has JP¥53.9b in cash to offset that, meaning it has JP¥33.9b net cash.

How Strong Is ZOZO's Balance Sheet?

We can see from the most recent balance sheet that ZOZO had liabilities of JP¥66.7b falling due within a year, and liabilities of JP¥10.7b due beyond that. Offsetting this, it had JP¥53.9b in cash and JP¥44.4b in receivables that were due within 12 months. So it actually has JP¥21.0b more liquid assets than total liabilities.

This state of affairs indicates that ZOZO's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the JP¥1.15t company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, ZOZO boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for ZOZO

Fortunately, ZOZO grew its EBIT by 6.1% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if ZOZO can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While ZOZO has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, ZOZO produced sturdy free cash flow equating to 62% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case ZOZO has JP¥33.9b in net cash and a decent-looking balance sheet. So we don't think ZOZO's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for ZOZO you should be aware of.

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.

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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.