Noritz (TSE:5943) Takes On Some Risk With Its Use Of Debt

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.' 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 note that Noritz Corporation (TSE:5943) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Noritz's Debt?

As you can see below, at the end of December 2024, Noritz had JP¥3.79b of debt, up from JP¥2.53b a year ago. Click the image for more detail. But on the other hand it also has JP¥29.0b in cash, leading to a JP¥25.2b net cash position.

How Strong Is Noritz's Balance Sheet?

The latest balance sheet data shows that Noritz had liabilities of JP¥68.6b due within a year, and liabilities of JP¥18.2b falling due after that. Offsetting this, it had JP¥29.0b in cash and JP¥56.9b in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Noritz's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the JP¥71.4b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Noritz boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Noritz

In fact Noritz's saving grace is its low debt levels, because its EBIT has tanked 38% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Noritz 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. Noritz 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. Over the last three years, Noritz saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

We could understand if investors are concerned about Noritz's liabilities, but we can be reassured by the fact it has has net cash of JP¥25.2b. So although we see some areas for improvement, we're not too worried about Noritz's balance sheet. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Noritz is showing 3 warning signs in our investment analysis , and 2 of those make us uncomfortable...

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.