Daifuku (TSE:6383) Could Easily Take On More Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Daifuku Co., Ltd. (TSE:6383) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Daifuku

What Is Daifuku's Debt?

You can click the graphic below for the historical numbers, but it shows that Daifuku had JP¥64.2b of debt in September 2024, down from JP¥73.4b, one year before. However, its balance sheet shows it holds JP¥199.8b in cash, so it actually has JP¥135.5b net cash.

A Look At Daifuku's Liabilities

Zooming in on the latest balance sheet data, we can see that Daifuku had liabilities of JP¥217.7b due within 12 months and liabilities of JP¥77.4b due beyond that. Offsetting this, it had JP¥199.8b in cash and JP¥241.8b in receivables that were due within 12 months. So it can boast JP¥146.4b more liquid assets than total liabilities.

This short term liquidity is a sign that Daifuku could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Daifuku boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Daifuku has boosted its EBIT by 52%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Daifuku's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Daifuku has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Daifuku recorded free cash flow worth 58% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Daifuku has JP¥135.5b in net cash and a decent-looking balance sheet. And we liked the look of last year's 52% year-on-year EBIT growth. So we don't think Daifuku's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Daifuku, you may well want to click here to check an interactive graph of its earnings per share history.

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.