These 4 Measures Indicate That Nippon Kanryu Industry (FKSE:1771) Is Using Debt Safely

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Nippon Kanryu Industry Co., Ltd. (FKSE:1771) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Nippon Kanryu Industry

How Much Debt Does Nippon Kanryu Industry Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Nippon Kanryu Industry had debt of JP¥790.0m, up from none in one year. But it also has JP¥2.94b in cash to offset that, meaning it has JP¥2.15b net cash.

How Strong Is Nippon Kanryu Industry's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nippon Kanryu Industry had liabilities of JP¥4.53b due within 12 months and liabilities of JP¥788.0m due beyond that. Offsetting these obligations, it had cash of JP¥2.94b as well as receivables valued at JP¥4.27b due within 12 months. So it can boast JP¥1.90b more liquid assets than total liabilities.

This luscious liquidity implies that Nippon Kanryu Industry's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Nippon Kanryu Industry boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Nippon Kanryu Industry grew its EBIT by 2.3% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But it is Nippon Kanryu Industry's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Nippon Kanryu Industry 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, Nippon Kanryu Industry's free cash flow amounted to 43% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case Nippon Kanryu Industry has JP¥2.15b in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 2.3% in the last twelve months. So is Nippon Kanryu Industry'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. Take risks, for example - Nippon Kanryu Industry has 2 warning signs we think you should be aware of.

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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