Koito Manufacturing (TSE:7276) 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. Importantly, Koito Manufacturing Co., Ltd. (TSE:7276) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Koito Manufacturing

What Is Koito Manufacturing's Debt?

The image below, which you can click on for greater detail, shows that Koito Manufacturing had debt of JP¥7.00b at the end of December 2024, a reduction from JP¥11.4b over a year. But on the other hand it also has JP¥284.2b in cash, leading to a JP¥277.2b net cash position.

How Healthy Is Koito Manufacturing's Balance Sheet?

We can see from the most recent balance sheet that Koito Manufacturing had liabilities of JP¥173.1b falling due within a year, and liabilities of JP¥41.7b due beyond that. Offsetting this, it had JP¥284.2b in cash and JP¥130.3b in receivables that were due within 12 months. So it actually has JP¥199.8b more liquid assets than total liabilities.

This luscious liquidity implies that Koito Manufacturing's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Koito Manufacturing boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Koito Manufacturing's load is not too heavy, because its EBIT was down 41% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Koito Manufacturing'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, a company can only pay off debt with cold hard cash, not accounting profits. While Koito Manufacturing 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. During the last three years, Koito Manufacturing generated free cash flow amounting to a very robust 80% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Koito Manufacturing has JP¥277.2b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥34b, being 80% of its EBIT. So we don't think Koito Manufacturing's use of debt is risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with Koito Manufacturing .

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.