Is DENSO (TSE:6902) 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. Importantly, DENSO Corporation (TSE:6902) does carry debt. But should shareholders be worried about its use of debt?

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When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is DENSO's Debt?

As you can see below, DENSO had JP¥699.4b of debt at March 2025, down from JP¥850.7b a year prior. But on the other hand it also has JP¥986.5b in cash, leading to a JP¥287.1b net cash position.

A Look At DENSO's Liabilities

Zooming in on the latest balance sheet data, we can see that DENSO had liabilities of JP¥2.06t due within 12 months and liabilities of JP¥877.0b due beyond that. Offsetting these obligations, it had cash of JP¥986.5b as well as receivables valued at JP¥1.24t due within 12 months. So its liabilities total JP¥706.6b more than the combination of its cash and short-term receivables.

Since publicly traded DENSO shares are worth a very impressive total of JP¥5.29t, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, DENSO boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for DENSO

Also positive, DENSO grew its EBIT by 29% in the last year, and that should make it easier to pay down debt, going forward. 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 DENSO'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. DENSO 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. During the last three years, DENSO produced sturdy free cash flow equating to 78% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While DENSO does have more liabilities than liquid assets, it also has net cash of JP¥287.1b. And we liked the look of last year's 29% year-on-year EBIT growth. So we don't think DENSO's use of debt is risky. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check DENSO's dividend history, without delay!

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.