These 4 Measures Indicate That Noritsu Koki (TSE:7744) Is Using Debt Safely

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. As with many other companies Noritsu Koki Co., Ltd. (TSE:7744) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Noritsu Koki

What Is Noritsu Koki's Debt?

The image below, which you can click on for greater detail, shows that Noritsu Koki had debt of JP¥36.0b at the end of June 2024, a reduction from JP¥41.2b over a year. However, it does have JP¥95.3b in cash offsetting this, leading to net cash of JP¥59.3b.

How Strong Is Noritsu Koki's Balance Sheet?

We can see from the most recent balance sheet that Noritsu Koki had liabilities of JP¥32.7b falling due within a year, and liabilities of JP¥41.6b due beyond that. Offsetting these obligations, it had cash of JP¥95.3b as well as receivables valued at JP¥15.4b due within 12 months. So it can boast JP¥36.4b more liquid assets than total liabilities.

This excess liquidity suggests that Noritsu Koki is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Noritsu Koki has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Noritsu Koki grew its EBIT by 81% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Noritsu Koki's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Noritsu Koki 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 three years, Noritsu Koki 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 it is always sensible to investigate a company's debt, in this case Noritsu Koki has JP¥59.3b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 81% over the last year. So is Noritsu Koki's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Noritsu Koki (1 is a bit concerning!) 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.