Does NHK Spring (TSE:5991) Have A Healthy Balance Sheet?

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. We note that NHK Spring Co., Ltd. (TSE:5991) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for NHK Spring

What Is NHK Spring's Net Debt?

As you can see below, NHK Spring had JP¥47.9b of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds JP¥98.3b in cash, so it actually has JP¥50.4b net cash.

How Strong Is NHK Spring's Balance Sheet?

The latest balance sheet data shows that NHK Spring had liabilities of JP¥185.5b due within a year, and liabilities of JP¥85.1b falling due after that. Offsetting these obligations, it had cash of JP¥98.3b as well as receivables valued at JP¥165.8b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥6.45b.

Having regard to NHK Spring's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the JP¥398.5b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, NHK Spring boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that NHK Spring has boosted its EBIT by 52%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine NHK Spring'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, a company can only pay off debt with cold hard cash, not accounting profits. NHK Spring 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, NHK Spring's free cash flow amounted to 36% 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 look at a company's total liabilities, it is very reassuring that NHK Spring has JP¥50.4b in net cash. And it impressed us with its EBIT growth of 52% over the last year. So is NHK Spring's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for NHK Spring you should know about.

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.

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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.