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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies The Japan Steel Works, Ltd. (TSE:5631) makes use of debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
View 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 JPĀ„43.1b in debt in June 2024; about the same as the year before. However, its balance sheet shows it holds JPĀ„90.8b in cash, so it actually has JPĀ„47.7b net cash.
A Look At Japan Steel Works' Liabilities
Zooming in on the latest balance sheet data, we can see that Japan Steel Works had liabilities of JPĀ„158.4b due within 12 months and liabilities of JPĀ„34.7b due beyond that. On the other hand, it had cash of JPĀ„90.8b and JPĀ„60.4b worth of receivables due within a year. So it has liabilities totalling JPĀ„41.9b more than its cash and near-term receivables, combined.
Of course, Japan Steel Works has a market capitalization of JPĀ„308.8b, so these liabilities are probably manageable. 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 22% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Japan Steel Works 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Looking at the most recent three years, Japan Steel Works recorded free cash flow of 41% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.
Summing Up
While Japan Steel Works does have more liabilities than liquid assets, it also has net cash of JPĀ„47.7b. And it impressed us with its EBIT growth of 22% over the last year. So is Japan Steel Works'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. Be aware that Japan Steel Works is showing 1 warning sign in our investment analysis , you should know about...
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.
About TSE:5631
Japan Steel Works
Engages in the provision of industrial machinery products, and material and engineering business in Japan and internationally.
Flawless balance sheet with proven track record.
