Here's Why Nichias (TSE:5393) Can Manage Its Debt Responsibly

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. As with many other companies Nichias Corporation (TSE:5393) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Nichias

What Is Nichias's Debt?

You can click the graphic below for the historical numbers, but it shows that Nichias had JP¥21.8b of debt in March 2024, down from JP¥23.5b, one year before. But on the other hand it also has JP¥56.4b in cash, leading to a JP¥34.6b net cash position.

How Strong Is Nichias' Balance Sheet?

The latest balance sheet data shows that Nichias had liabilities of JP¥75.3b due within a year, and liabilities of JP¥14.6b falling due after that. On the other hand, it had cash of JP¥56.4b and JP¥75.4b worth of receivables due within a year. So it can boast JP¥42.0b more liquid assets than total liabilities.

This short term liquidity is a sign that Nichias could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Nichias has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Nichias grew its EBIT at 18% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Nichias can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Nichias may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Nichias recorded free cash flow of 35% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Nichias has JP¥34.6b in net cash and a decent-looking balance sheet. And we liked the look of last year's 18% year-on-year EBIT growth. So is Nichias's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Nichias you should be aware of.

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. 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.