We Think NOK (TSE:7240) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, NOK Corporation (TSE:7240) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for NOK

What Is NOK's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 NOK had debt of JP¥83.6b, up from JP¥74.8b in one year. But on the other hand it also has JP¥130.1b in cash, leading to a JP¥46.5b net cash position.

How Strong Is NOK's Balance Sheet?

We can see from the most recent balance sheet that NOK had liabilities of JP¥213.0b falling due within a year, and liabilities of JP¥101.7b due beyond that. On the other hand, it had cash of JP¥130.1b and JP¥181.0b worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to NOK's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the JP¥371.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, NOK boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, NOK grew its EBIT by 92% over the last twelve months, and that growth will make it easier to handle its debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. In the last three years, NOK's free cash flow amounted to 33% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about NOK's liabilities, but we can be reassured by the fact it has has net cash of JP¥46.5b. And we liked the look of last year's 92% year-on-year EBIT growth. So is NOK's debt a risk? It doesn't seem so to us. 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. Be aware that NOK is showing 2 warning signs in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.