We Think Shin Nippon Air Technologies (TSE:1952) Can Manage Its Debt With Ease

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.' 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 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?

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 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Shin Nippon Air Technologies

What Is Shin Nippon Air Technologies's Net Debt?

The image below, which you can click on for greater detail, shows that Shin Nippon Air Technologies had debt of JP¥1.32b at the end of September 2024, a reduction from JP¥1.53b over a year. But on the other hand it also has JP¥14.2b in cash, leading to a JP¥12.9b net cash position.

How Strong Is Shin Nippon Air Technologies' Balance Sheet?

According to the last reported balance sheet, Shin Nippon Air Technologies had liabilities of JP¥27.5b due within 12 months, and liabilities of JP¥4.23b due beyond 12 months. On the other hand, it had cash of JP¥14.2b and JP¥46.5b worth of receivables due within a year. So it can boast JP¥29.0b 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 62%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Shin Nippon Air Technologies will need earnings to service that debt. 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 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's free cash flow amounted to 34% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shin Nippon Air Technologies has net cash of JP¥12.9b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 62% over the last year. So we don't think Shin Nippon Air Technologies's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Shin Nippon Air Technologies that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.