Is NC Holdings (TSE:6236) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, NC Holdings Co., Ltd. (TSE:6236) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for NC Holdings

What Is NC Holdings's Debt?

The image below, which you can click on for greater detail, shows that NC Holdings had debt of JP¥630.0m at the end of December 2023, a reduction from JP¥776.0m over a year. But it also has JP¥4.46b in cash to offset that, meaning it has JP¥3.83b net cash.

How Strong Is NC Holdings' Balance Sheet?

We can see from the most recent balance sheet that NC Holdings had liabilities of JP¥5.15b falling due within a year, and liabilities of JP¥1.44b due beyond that. On the other hand, it had cash of JP¥4.46b and JP¥2.97b worth of receivables due within a year. So it can boast JP¥846.0m more liquid assets than total liabilities.

This short term liquidity is a sign that NC Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that NC Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, NC Holdings grew its EBIT by 61% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since NC Holdings will need earnings to service that debt. 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. NC Holdings 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. During the last three years, NC Holdings generated free cash flow amounting to a very robust 92% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case NC Holdings has JP¥3.83b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥1.2b, being 92% of its EBIT. So is NC Holdings's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. 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 3 warning signs for NC Holdings you should know about.

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.