Does NOK (TSE:7240) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that NOK Corporation (TSE:7240) does use debt in its business. But the real question is whether this debt is making the company risky.

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When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does NOK Carry?

As you can see below, NOK had JP¥67.6b of debt at December 2024, down from JP¥75.5b a year prior. But it also has JP¥133.8b in cash to offset that, meaning it has JP¥66.3b net cash.

How Strong Is NOK's Balance Sheet?

According to the last reported balance sheet, NOK had liabilities of JP¥198.1b due within 12 months, and liabilities of JP¥98.9b due beyond 12 months. Offsetting these obligations, it had cash of JP¥133.8b as well as receivables valued at JP¥184.3b due within 12 months. So it can boast JP¥21.1b more liquid assets than total liabilities.

This surplus suggests that NOK has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, NOK boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for NOK

Better yet, NOK grew its EBIT by 104% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if NOK 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While NOK 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. Over the last three years, NOK reported free cash flow worth 13% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that NOK has net cash of JP¥66.3b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 104% over the last year. So we don't think NOK's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that NOK is showing 2 warning signs in our investment analysis , 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.