Is Makino Milling Machine (TSE:6135) Using Too Much Debt?

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 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 Makino Milling Machine Co., Ltd. (TSE:6135) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Makino Milling Machine

How Much Debt Does Makino Milling Machine Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Makino Milling Machine had debt of JP¥56.0b, up from JP¥53.1b in one year. But on the other hand it also has JP¥77.7b in cash, leading to a JP¥21.7b net cash position.

A Look At Makino Milling Machine's Liabilities

The latest balance sheet data shows that Makino Milling Machine had liabilities of JP¥83.7b due within a year, and liabilities of JP¥58.7b falling due after that. Offsetting these obligations, it had cash of JP¥77.7b as well as receivables valued at JP¥43.3b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥21.4b.

Since publicly traded Makino Milling Machine shares are worth a total of JP¥128.4b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Makino Milling Machine boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Makino Milling Machine's saving grace is its low debt levels, because its EBIT has tanked 25% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Makino Milling Machine 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. While Makino Milling Machine has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Makino Milling Machine reported free cash flow worth 12% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While Makino Milling Machine does have more liabilities than liquid assets, it also has net cash of JP¥21.7b. So while Makino Milling Machine does not have a great balance sheet, it's certainly not too bad. 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. To that end, you should be aware of the 1 warning sign we've spotted with Makino Milling Machine .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.