Is Okuma (TSE:6103) A Risky Investment?

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.' 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. Importantly, Okuma Corporation (TSE:6103) does carry debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Okuma

How Much Debt Does Okuma Carry?

The image below, which you can click on for greater detail, shows that at December 2024 Okuma had debt of JP¥10.0b, up from JP¥5.00b in one year. However, it does have JP¥52.1b in cash offsetting this, leading to net cash of JP¥42.1b.

A Look At Okuma's Liabilities

Zooming in on the latest balance sheet data, we can see that Okuma had liabilities of JP¥43.1b due within 12 months and liabilities of JP¥16.1b due beyond that. Offsetting this, it had JP¥52.1b in cash and JP¥35.2b in receivables that were due within 12 months. So it actually has JP¥28.0b more liquid assets than total liabilities.

This surplus suggests that Okuma has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Okuma boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Okuma if management cannot prevent a repeat of the 32% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Okuma's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Okuma 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. In the last three years, Okuma's free cash flow amounted to 21% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Okuma has JP¥42.1b in net cash and a decent-looking balance sheet. So we don't have any problem with Okuma'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 example - Okuma has 1 warning sign we think you should be aware of.

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.