Nippon Hume (TSE:5262) Has A Rock Solid Balance Sheet

Warren Buffett famously said, '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 can see that Nippon Hume Corporation (TSE:5262) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Nippon Hume

How Much Debt Does Nippon Hume Carry?

You can click the graphic below for the historical numbers, but it shows that Nippon Hume had JP¥863.0m of debt in December 2024, down from JP¥1.09b, one year before. But on the other hand it also has JP¥14.0b in cash, leading to a JP¥13.1b net cash position.

How Healthy Is Nippon Hume's Balance Sheet?

The latest balance sheet data shows that Nippon Hume had liabilities of JP¥12.8b due within a year, and liabilities of JP¥4.89b falling due after that. Offsetting this, it had JP¥14.0b in cash and JP¥11.3b in receivables that were due within 12 months. So it can boast JP¥7.58b more liquid assets than total liabilities.

This surplus suggests that Nippon Hume is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Nippon Hume boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Nippon Hume grew its EBIT by 96% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is Nippon Hume's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Nippon Hume 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, Nippon Hume actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Nippon Hume has JP¥13.1b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥3.7b, being 104% of its EBIT. The bottom line is that we do not find Nippon Hume's debt levels at all concerning. 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. Be aware that Nippon Hume is showing 1 warning sign in our investment analysis , you should know about...

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.