Waida Mfg.Ltd (TYO:6158) Has A Pretty Healthy Balance Sheet

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. We note that Waida Mfg. Co.,Ltd. (TYO:6158) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

Check out our latest analysis for Waida Mfg.Ltd

What Is Waida Mfg.Ltd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Waida Mfg.Ltd had JP¥1.67b of debt, an increase on JP¥846.0m, over one year. However, it does have JP¥5.51b in cash offsetting this, leading to net cash of JP¥3.84b.

How Strong Is Waida Mfg.Ltd's Balance Sheet?

According to the last reported balance sheet, Waida Mfg.Ltd had liabilities of JP¥983.0m due within 12 months, and liabilities of JP¥1.62b due beyond 12 months. Offsetting these obligations, it had cash of JP¥5.51b as well as receivables valued at JP¥744.0m due within 12 months. So it actually has JP¥3.65b more liquid assets than total liabilities.

This surplus liquidity suggests that Waida Mfg.Ltd's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Waida Mfg.Ltd has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Waida Mfg.Ltd's load is not too heavy, because its EBIT was down 60% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is Waida Mfg.Ltd'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Waida Mfg.Ltd 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, Waida Mfg.Ltd produced sturdy free cash flow equating to 72% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Waida Mfg.Ltd has net cash of JP¥3.84b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥1.1b, being 72% of its EBIT. So is Waida Mfg.Ltd'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. However, not all investment risk resides within the balance sheet - far from it. Consider risks, for instance. Every company has them, and we've spotted 3 warning signs for Waida Mfg.Ltd you should know about.

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. 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.
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