Is Nissei ASB Machine (TSE:6284) 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. Importantly, Nissei ASB Machine Co., Ltd. (TSE:6284) does carry debt. But the more important question is: how much risk is that debt creating?

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Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Nissei ASB Machine Carry?

The image below, which you can click on for greater detail, shows that Nissei ASB Machine had debt of JP¥7.24b at the end of December 2024, a reduction from JP¥8.73b over a year. But on the other hand it also has JP¥28.4b in cash, leading to a JP¥21.1b net cash position.

A Look At Nissei ASB Machine's Liabilities

Zooming in on the latest balance sheet data, we can see that Nissei ASB Machine had liabilities of JP¥13.3b due within 12 months and liabilities of JP¥7.77b due beyond that. Offsetting this, it had JP¥28.4b in cash and JP¥7.41b in receivables that were due within 12 months. So it actually has JP¥14.7b more liquid assets than total liabilities.

It's good to see that Nissei ASB Machine has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Nissei ASB Machine boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Nissei ASB Machine

Also good is that Nissei ASB Machine grew its EBIT at 13% over the last year, further increasing its ability to manage debt. 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 Nissei ASB Machine's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Nissei ASB Machine 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, Nissei ASB Machine recorded free cash flow worth a fulsome 90% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Nissei ASB Machine has net cash of JP¥21.1b, as well as more liquid assets than liabilities. The cherry on top was that in converted 90% of that EBIT to free cash flow, bringing in JP¥8.8b. So we don't think Nissei ASB Machine's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Nissei ASB Machine, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.