Here's Why Nabtesco (TSE:6268) Can Manage Its Debt Responsibly

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.' 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 Nabtesco Corporation (TSE:6268) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Nabtesco

What Is Nabtesco's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Nabtesco had debt of JP¥31.8b, up from JP¥22.7b in one year. However, its balance sheet shows it holds JP¥78.2b in cash, so it actually has JP¥46.4b net cash.

A Look At Nabtesco's Liabilities

Zooming in on the latest balance sheet data, we can see that Nabtesco had liabilities of JP¥110.7b due within 12 months and liabilities of JP¥37.2b due beyond that. Offsetting these obligations, it had cash of JP¥78.2b as well as receivables valued at JP¥74.4b due within 12 months. So it can boast JP¥4.65b more liquid assets than total liabilities.

This state of affairs indicates that Nabtesco's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the JP¥285.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Nabtesco boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly Nabtesco's EBIT was essentially flat over the last twelve months. We would prefer to see some earnings growth, because that always helps diminish debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Nabtesco can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Nabtesco 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. Over the last three years, Nabtesco saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Nabtesco has JP¥46.4b in net cash and a decent-looking balance sheet. So we don't have any problem with Nabtesco's use of debt. 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. We've identified 2 warning signs with Nabtesco (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.