Namura Shipbuilding (TSE:7014) Could Easily Take On More Debt

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. Importantly, Namura Shipbuilding Co., Ltd. (TSE:7014) does carry debt. 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Namura Shipbuilding had JP¥13.0b of debt, an increase on JP¥11.5b, over one year. But on the other hand it also has JP¥55.4b in cash, leading to a JP¥42.3b net cash position.

How Healthy Is Namura Shipbuilding's Balance Sheet?

The latest balance sheet data shows that Namura Shipbuilding had liabilities of JP¥72.0b due within a year, and liabilities of JP¥22.9b falling due after that. On the other hand, it had cash of JP¥55.4b and JP¥45.7b worth of receivables due within a year. So it can boast JP¥6.24b more liquid assets than total liabilities.

This short term liquidity is a sign that Namura Shipbuilding could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Namura Shipbuilding has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Namura Shipbuilding grew its EBIT by 72% 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 Namura Shipbuilding's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Namura Shipbuilding has net cash of JP¥42.3b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥25b, being 124% of its EBIT. So is Namura Shipbuilding'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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Namura Shipbuilding 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.

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