Is Japan Power FasteningLtd (TSE:5950) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Japan Power Fastening Co.,Ltd. (TSE:5950) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Japan Power FasteningLtd

How Much Debt Does Japan Power FasteningLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Japan Power FasteningLtd had JP¥2.04b of debt in September 2024, down from JP¥2.70b, one year before. However, it does have JP¥2.78b in cash offsetting this, leading to net cash of JP¥732.0m.

A Look At Japan Power FasteningLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Japan Power FasteningLtd had liabilities of JP¥3.14b due within 12 months and liabilities of JP¥645.0m due beyond that. Offsetting this, it had JP¥2.78b in cash and JP¥1.17b in receivables that were due within 12 months. So it actually has JP¥154.0m more liquid assets than total liabilities.

This surplus suggests that Japan Power FasteningLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Japan Power FasteningLtd has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Japan Power FasteningLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Japan Power FasteningLtd made a loss at the EBIT level, and saw its revenue drop to JP¥5.0b, which is a fall of 3.9%. We would much prefer see growth.

So How Risky Is Japan Power FasteningLtd?

Although Japan Power FasteningLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of JP¥437m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. Case in point: We've spotted 4 warning signs for Japan Power FasteningLtd you should be aware of, and 2 of them shouldn't be ignored.

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.