Is Morio Denki (TSE:6647) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Morio Denki Co., Ltd. (TSE:6647) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Morio Denki

What Is Morio Denki's Net Debt?

The image below, which you can click on for greater detail, shows that Morio Denki had debt of JP¥960.0m at the end of March 2024, a reduction from JP¥1.13b over a year. But on the other hand it also has JP¥979.0m in cash, leading to a JP¥19.0m net cash position.

How Healthy Is Morio Denki's Balance Sheet?

We can see from the most recent balance sheet that Morio Denki had liabilities of JP¥2.77b falling due within a year, and liabilities of JP¥715.0m due beyond that. Offsetting these obligations, it had cash of JP¥979.0m as well as receivables valued at JP¥1.58b due within 12 months. So its liabilities total JP¥930.0m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Morio Denki is worth JP¥2.13b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Morio Denki also has more cash than debt, so we're pretty confident it can manage its debt safely.

Another good sign is that Morio Denki has been able to increase its EBIT by 25% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Morio Denki's earnings that will influence how the balance sheet holds up in the future. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Morio Denki 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, Morio Denki 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

Although Morio Denki'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¥19.0m. And it impressed us with free cash flow of JP¥383m, being 105% of its EBIT. So is Morio Denki'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. To that end, you should be aware of the 2 warning signs we've spotted with Morio Denki .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com