Nippon Seiki (TSE:7287) Has A Pretty Healthy Balance Sheet

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. Importantly, Nippon Seiki Co., Ltd. (TSE:7287) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Nippon Seiki

How Much Debt Does Nippon Seiki Carry?

The image below, which you can click on for greater detail, shows that Nippon Seiki had debt of JP¥23.9b at the end of June 2024, a reduction from JP¥69.1b over a year. But it also has JP¥33.7b in cash to offset that, meaning it has JP¥9.79b net cash.

How Healthy Is Nippon Seiki's Balance Sheet?

The latest balance sheet data shows that Nippon Seiki had liabilities of JP¥72.2b due within a year, and liabilities of JP¥33.5b falling due after that. Offsetting this, it had JP¥33.7b in cash and JP¥47.1b in receivables that were due within 12 months. So it has liabilities totalling JP¥24.9b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Nippon Seiki has a market capitalization of JP¥61.8b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Nippon Seiki boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Nippon Seiki has been able to increase its EBIT by 20% in twelve months, making it easier to pay down 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 Nippon Seiki'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Nippon Seiki 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 two years, Nippon Seiki reported free cash flow worth 2.8% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

Although Nippon Seiki's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of JP¥9.79b. And it impressed us with its EBIT growth of 20% over the last year. So we are not troubled with Nippon Seiki's debt use. 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. To that end, you should be aware of the 2 warning signs we've spotted with Nippon Seiki .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.