Does Nippon RietecLtd (TSE:1938) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Nippon Rietec Co.,Ltd. (TSE:1938) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Nippon RietecLtd

How Much Debt Does Nippon RietecLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Nippon RietecLtd had JP¥500.0m of debt, an increase on none, over one year. But it also has JP¥8.91b in cash to offset that, meaning it has JP¥8.41b net cash.

How Healthy Is Nippon RietecLtd's Balance Sheet?

We can see from the most recent balance sheet that Nippon RietecLtd had liabilities of JP¥20.0b falling due within a year, and liabilities of JP¥7.53b due beyond that. On the other hand, it had cash of JP¥8.91b and JP¥38.0b worth of receivables due within a year. So it actually has JP¥19.4b more liquid assets than total liabilities.

This luscious liquidity implies that Nippon RietecLtd'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 RietecLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Nippon RietecLtd grew its EBIT by 28% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Nippon RietecLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Nippon RietecLtd 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 most recent three years, Nippon RietecLtd recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Nippon RietecLtd has JP¥8.41b in net cash and a decent-looking balance sheet. And we liked the look of last year's 28% year-on-year EBIT growth. The bottom line is that we do not find Nippon RietecLtd's debt levels at all concerning. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Nippon RietecLtd you should be aware of, and 1 of them doesn't sit too well with us.

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.

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