NOK (TSE:7240) Has A Pretty 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that NOK Corporation (TSE:7240) does have debt on its balance sheet. But is this debt a concern to shareholders?

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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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

What Is NOK's Net Debt?

You can click the graphic below for the historical numbers, but it shows that NOK had JP¥65.9b of debt in September 2025, down from JP¥77.6b, one year before. But on the other hand it also has JP¥133.8b in cash, leading to a JP¥67.9b net cash position.

How Healthy Is NOK's Balance Sheet?

We can see from the most recent balance sheet that NOK had liabilities of JP¥204.5b falling due within a year, and liabilities of JP¥92.7b due beyond that. Offsetting these obligations, it had cash of JP¥133.8b as well as receivables valued at JP¥173.0b due within 12 months. So it can boast JP¥9.63b more liquid assets than total liabilities.

This short term liquidity is a sign that NOK could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that NOK has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for NOK

On the other hand, NOK saw its EBIT drop by 8.7% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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 NOK'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. NOK 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. Happily for any shareholders, NOK actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case NOK has JP¥67.9b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥33b, being 101% of its EBIT. So we don't think NOK's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with NOK .

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.