These 4 Measures Indicate That Daikin IndustriesLtd (TSE:6367) Is Using Debt Reasonably Well

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Daikin Industries,Ltd. (TSE:6367) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Daikin IndustriesLtd

What Is Daikin IndustriesLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Daikin IndustriesLtd had JP¥915.9b of debt, an increase on JP¥876.6b, over one year. But it also has JP¥931.1b in cash to offset that, meaning it has JP¥15.3b net cash.

How Strong Is Daikin IndustriesLtd's Balance Sheet?

The latest balance sheet data shows that Daikin IndustriesLtd had liabilities of JP¥1.63t due within a year, and liabilities of JP¥778.2b falling due after that. Offsetting this, it had JP¥931.1b in cash and JP¥752.2b in receivables that were due within 12 months. So it has liabilities totalling JP¥720.2b more than its cash and near-term receivables, combined.

Since publicly traded Daikin IndustriesLtd shares are worth a very impressive total of JP¥4.87t, 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, Daikin IndustriesLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Daikin IndustriesLtd has increased its EBIT by 6.5% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Daikin IndustriesLtd 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Daikin IndustriesLtd 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. In the last three years, Daikin IndustriesLtd's free cash flow amounted to 33% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

Although Daikin IndustriesLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of JP¥15.3b. And it also grew its EBIT by 6.5% over the last year. So we don't have any problem with Daikin IndustriesLtd's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Daikin IndustriesLtd, you may well want to click here to check an interactive graph of its earnings per share history.

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.