Does Japan Steel Works (TSE:5631) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that The Japan Steel Works, Ltd. (TSE:5631) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Japan Steel Works

How Much Debt Does Japan Steel Works Carry?

The chart below, which you can click on for greater detail, shows that Japan Steel Works had JP¥42.0b in debt in September 2024; about the same as the year before. However, it does have JP¥76.3b in cash offsetting this, leading to net cash of JP¥34.3b.

How Strong Is Japan Steel Works' Balance Sheet?

According to the last reported balance sheet, Japan Steel Works had liabilities of JP¥146.1b due within 12 months, and liabilities of JP¥36.4b due beyond 12 months. On the other hand, it had cash of JP¥76.3b and JP¥53.2b worth of receivables due within a year. So its liabilities total JP¥53.0b more than the combination of its cash and short-term receivables.

Given Japan Steel Works has a market capitalization of JP¥379.6b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Japan Steel Works boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Japan Steel Works grew its EBIT by 24% 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 ultimately the future profitability of the business will decide if Japan Steel Works can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Japan Steel Works 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. Considering the last three years, Japan Steel Works actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While Japan Steel Works does have more liabilities than liquid assets, it also has net cash of JP¥34.3b. And it impressed us with its EBIT growth of 24% over the last year. So we don't have any problem with Japan Steel Works's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Japan Steel Works that you should be aware of.

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.