Does Okano Valve Mfg.Co.Ltd (TSE:6492) Have A Healthy Balance Sheet?

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. As with many other companies Okano Valve Mfg.Co.Ltd. (TSE:6492) makes use of debt. But should shareholders be worried about its use of debt?

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 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Okano Valve Mfg.Co.Ltd

What Is Okano Valve Mfg.Co.Ltd's Debt?

You can click the graphic below for the historical numbers, but it shows that Okano Valve Mfg.Co.Ltd had JP¥1.15b of debt in November 2023, down from JP¥1.46b, one year before. But it also has JP¥3.53b in cash to offset that, meaning it has JP¥2.39b net cash.

A Look At Okano Valve Mfg.Co.Ltd's Liabilities

The latest balance sheet data shows that Okano Valve Mfg.Co.Ltd had liabilities of JP¥1.33b due within a year, and liabilities of JP¥1.37b falling due after that. Offsetting this, it had JP¥3.53b in cash and JP¥3.88b in receivables that were due within 12 months. So it can boast JP¥4.72b more liquid assets than total liabilities.

This surplus liquidity suggests that Okano Valve Mfg.Co.Ltd's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Okano Valve Mfg.Co.Ltd has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Okano Valve Mfg.Co.Ltd has boosted its EBIT by 66%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Okano Valve Mfg.Co.Ltd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Okano Valve Mfg.Co.Ltd 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, Okano Valve Mfg.Co.Ltd actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Okano Valve Mfg.Co.Ltd has net cash of JP¥2.39b, as well as more liquid assets than liabilities. The cherry on top was that in converted 113% of that EBIT to free cash flow, bringing in JP¥299m. At the end of the day we're not concerned about Okano Valve Mfg.Co.Ltd's debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Okano Valve Mfg.Co.Ltd is showing 1 warning sign in our investment analysis , you should know about...

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.