Is Stanley Electric (TSE:6923) A Risky Investment?

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. We can see that Stanley Electric Co., Ltd. (TSE:6923) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Stanley Electric

What Is Stanley Electric's Net Debt?

As you can see below, Stanley Electric had JP¥10.0b of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has JP¥182.8b in cash, leading to a JP¥172.8b net cash position.

How Strong Is Stanley Electric's Balance Sheet?

The latest balance sheet data shows that Stanley Electric had liabilities of JP¥95.8b due within a year, and liabilities of JP¥17.5b falling due after that. Offsetting this, it had JP¥182.8b in cash and JP¥79.8b in receivables that were due within 12 months. So it actually has JP¥149.3b more liquid assets than total liabilities.

This excess liquidity is a great indication that Stanley Electric's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Stanley Electric has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Stanley Electric grew its EBIT by 51% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Stanley Electric'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Stanley Electric 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. Over the last three years, Stanley Electric recorded free cash flow worth a fulsome 86% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Stanley Electric has net cash of JP¥172.8b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥39b, being 86% of its EBIT. When it comes to Stanley Electric's debt, we sufficiently relaxed that our mind turns to the jacuzzi. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Stanley Electric has 1 warning sign we think 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.