Is Shin Nippon Air Technologies (TSE:1952) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Shin Nippon Air Technologies Co., Ltd. (TSE:1952) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Shin Nippon Air Technologies

What Is Shin Nippon Air Technologies's Debt?

As you can see below, at the end of March 2024, Shin Nippon Air Technologies had JP¥9.90b of debt, up from JP¥3.68b a year ago. Click the image for more detail. However, it does have JP¥13.6b in cash offsetting this, leading to net cash of JP¥3.73b.

How Strong Is Shin Nippon Air Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shin Nippon Air Technologies had liabilities of JP¥48.2b due within 12 months and liabilities of JP¥3.53b due beyond that. Offsetting this, it had JP¥13.6b in cash and JP¥67.2b in receivables that were due within 12 months. So it actually has JP¥29.1b more liquid assets than total liabilities.

This excess liquidity is a great indication that Shin Nippon Air Technologies' balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Shin Nippon Air Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Shin Nippon Air Technologies has boosted its EBIT by 30%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shin Nippon Air Technologies 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Shin Nippon Air Technologies 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. In the last three years, Shin Nippon Air Technologies created free cash flow amounting to 17% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shin Nippon Air Technologies has JP¥3.73b in net cash and a decent-looking balance sheet. And we liked the look of last year's 30% year-on-year EBIT growth. So is Shin Nippon Air Technologies's debt a risk? It doesn't seem so to us. 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. Be aware that Shin Nippon Air Technologies is showing 3 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com