Is Namura Shipbuilding (TSE:7014) A Risky Investment?

Warren Buffett famously said, '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. We can see that Namura Shipbuilding Co., Ltd. (TSE:7014) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Namura Shipbuilding

How Much Debt Does Namura Shipbuilding Carry?

The image below, which you can click on for greater detail, shows that Namura Shipbuilding had debt of JP¥10.4b at the end of December 2023, a reduction from JP¥14.7b over a year. But it also has JP¥41.2b in cash to offset that, meaning it has JP¥30.9b net cash.

A Look At Namura Shipbuilding's Liabilities

The latest balance sheet data shows that Namura Shipbuilding had liabilities of JP¥67.1b due within a year, and liabilities of JP¥21.4b falling due after that. On the other hand, it had cash of JP¥41.2b and JP¥44.1b worth of receivables due within a year. So it has liabilities totalling JP¥3.22b more than its cash and near-term receivables, combined.

Given Namura Shipbuilding has a market capitalization of JP¥144.7b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Namura Shipbuilding boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Namura Shipbuilding grew its EBIT by 104% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is Namura Shipbuilding'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Namura Shipbuilding 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 two years, Namura Shipbuilding actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

We could understand if investors are concerned about Namura Shipbuilding's liabilities, but we can be reassured by the fact it has has net cash of JP¥30.9b. And it impressed us with free cash flow of JP¥11b, being 123% of its EBIT. So we don't think Namura Shipbuilding's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Namura Shipbuilding .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.