Is Odawara Engineering (TYO:6149) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Odawara Engineering Co., Ltd. (TYO:6149) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

View our latest analysis for Odawara Engineering

How Much Debt Does Odawara Engineering Carry?

As you can see below, at the end of December 2020, Odawara Engineering had JP¥3.05b of debt, up from none a year ago. Click the image for more detail. However, it does have JP¥5.95b in cash offsetting this, leading to net cash of JP¥2.90b.

A Look At Odawara Engineering's Liabilities

The latest balance sheet data shows that Odawara Engineering had liabilities of JP¥9.86b due within a year, and liabilities of JP¥395.0m falling due after that. On the other hand, it had cash of JP¥5.95b and JP¥3.44b worth of receivables due within a year. So it has liabilities totalling JP¥871.0m more than its cash and near-term receivables, combined.

Since publicly traded Odawara Engineering shares are worth a total of JP¥16.9b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Odawara Engineering also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Odawara Engineering's saving grace is its low debt levels, because its EBIT has tanked 56% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Odawara Engineering can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Odawara Engineering 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 three years, Odawara Engineering saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Odawara Engineering has JP¥2.90b in net cash. So while Odawara Engineering does not have a great balance sheet, it's certainly not too bad. 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. For instance, we've identified 1 warning sign for Odawara Engineering that you should be aware of.

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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