We Think Nitto Kogyo (TSE:6651) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Nitto Kogyo Corporation (TSE:6651) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Nitto Kogyo

How Much Debt Does Nitto Kogyo Carry?

The image below, which you can click on for greater detail, shows that at December 2023 Nitto Kogyo had debt of JP¥18.1b, up from JP¥5.00b in one year. But on the other hand it also has JP¥23.6b in cash, leading to a JP¥5.55b net cash position.

How Strong Is Nitto Kogyo's Balance Sheet?

According to the last reported balance sheet, Nitto Kogyo had liabilities of JP¥26.0b due within 12 months, and liabilities of JP¥21.1b due beyond 12 months. On the other hand, it had cash of JP¥23.6b and JP¥36.8b worth of receivables due within a year. So it actually has JP¥13.3b more liquid assets than total liabilities.

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

On top of that, Nitto Kogyo grew its EBIT by 65% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Nitto Kogyo's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Nitto Kogyo 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 last three years, Nitto Kogyo recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Nitto Kogyo has net cash of JP¥5.55b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 65% over the last year. So we are not troubled with Nitto Kogyo's debt use. 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 example, we've discovered 1 warning sign for Nitto Kogyo that you should be aware of before investing here.

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.