Here's Why Diamond Electric Holdings (TSE:6699) Has A Meaningful Debt Burden

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Diamond Electric Holdings Co., Ltd. (TSE:6699) makes use of debt. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Diamond Electric Holdings's Debt?

The image below, which you can click on for greater detail, shows that Diamond Electric Holdings had debt of JP¥37.5b at the end of June 2025, a reduction from JP¥39.3b over a year. However, because it has a cash reserve of JP¥8.28b, its net debt is less, at about JP¥29.2b.

How Healthy Is Diamond Electric Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Diamond Electric Holdings had liabilities of JP¥54.6b due within 12 months and liabilities of JP¥13.7b due beyond that. Offsetting these obligations, it had cash of JP¥8.28b as well as receivables valued at JP¥14.0b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥46.0b.

This deficit casts a shadow over the JP¥5.42b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Diamond Electric Holdings would likely require a major re-capitalisation if it had to pay its creditors today.

View our latest analysis for Diamond Electric Holdings

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Diamond Electric Holdings's debt is 5.0 times its EBITDA, and its EBIT cover its interest expense 3.1 times over. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. The silver lining is that Diamond Electric Holdings grew its EBIT by 311% last year, which nourishing like the idealism of youth. If that earnings trend continues it will make its debt load much more manageable in the future. There's no doubt that we learn most about debt from the balance sheet. But it is Diamond Electric Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. During the last two years, Diamond Electric Holdings produced sturdy free cash flow equating to 65% 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.

Our View

We'd go so far as to say Diamond Electric Holdings's level of total liabilities was disappointing. But at least it's pretty decent at growing its EBIT; that's encouraging. Looking at the balance sheet and taking into account all these factors, we do believe that debt is making Diamond Electric Holdings stock a bit risky. That's not necessarily a bad thing, but we'd generally feel more comfortable with less leverage. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Diamond Electric Holdings has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.