Is Okumura Engineering (TSE:6229) Using Too Much 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Okumura Engineering corp. (TSE:6229) does use debt in its business. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Okumura Engineering Carry?

You can click the graphic below for the historical numbers, but it shows that Okumura Engineering had JP¥788.0m of debt in June 2025, down from JP¥883.0m, one year before. But it also has JP¥1.32b in cash to offset that, meaning it has JP¥534.0m net cash.

How Strong Is Okumura Engineering's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Okumura Engineering had liabilities of JP¥2.34b due within 12 months and liabilities of JP¥517.0m due beyond that. Offsetting these obligations, it had cash of JP¥1.32b as well as receivables valued at JP¥4.35b due within 12 months. So it actually has JP¥2.81b more liquid assets than total liabilities.

This excess liquidity is a great indication that Okumura Engineering's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Okumura Engineering has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Okumura Engineering

Another good sign is that Okumura Engineering has been able to increase its EBIT by 28% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Okumura Engineering's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Okumura Engineering 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. Considering the last three years, Okumura Engineering actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case Okumura Engineering has JP¥534.0m in net cash and a decent-looking balance sheet. And we liked the look of last year's 28% year-on-year EBIT growth. So we don't think Okumura Engineering's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Okumura Engineering (of which 1 can't be ignored!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.