We Think Okano Valve Mfg.Co.Ltd (TSE:6492) Can Manage Its Debt With Ease

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.' 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. As with many other companies Okano Valve Mfg.Co.Ltd. (TSE:6492) makes use of debt. But the real question is whether this debt is making the company risky.

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What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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.

How Much Debt Does Okano Valve Mfg.Co.Ltd Carry?

As you can see below, Okano Valve Mfg.Co.Ltd had JP¥757.0m of debt at February 2025, down from JP¥1.07b a year prior. However, its balance sheet shows it holds JP¥4.27b in cash, so it actually has JP¥3.51b net cash.

How Healthy Is Okano Valve Mfg.Co.Ltd's Balance Sheet?

According to the last reported balance sheet, Okano Valve Mfg.Co.Ltd had liabilities of JP¥1.17b due within 12 months, and liabilities of JP¥847.0m due beyond 12 months. Offsetting these obligations, it had cash of JP¥4.27b as well as receivables valued at JP¥2.45b due within 12 months. So it can boast JP¥4.71b more liquid assets than total liabilities.

This luscious liquidity implies that Okano Valve Mfg.Co.Ltd's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Okano Valve Mfg.Co.Ltd boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Okano Valve Mfg.Co.Ltd

But the other side of the story is that Okano Valve Mfg.Co.Ltd saw its EBIT decline by 9.9% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Okano Valve Mfg.Co.Ltd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Okano Valve Mfg.Co.Ltd 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. Happily for any shareholders, Okano Valve Mfg.Co.Ltd actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Okano Valve Mfg.Co.Ltd has JP¥3.51b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥1.9b, being 134% of its EBIT. So is Okano Valve Mfg.Co.Ltd's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Okano Valve Mfg.Co.Ltd that you should be aware of.

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.