Narasaki Sangyo (TSE:8085) Has A Rock Solid Balance Sheet

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Narasaki Sangyo Co., Ltd. (TSE:8085) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Narasaki Sangyo

How Much Debt Does Narasaki Sangyo Carry?

You can click the graphic below for the historical numbers, but it shows that Narasaki Sangyo had JP¥1.85b of debt in June 2024, down from JP¥2.23b, one year before. However, its balance sheet shows it holds JP¥12.4b in cash, so it actually has JP¥10.6b net cash.

A Look At Narasaki Sangyo's Liabilities

The latest balance sheet data shows that Narasaki Sangyo had liabilities of JP¥26.8b due within a year, and liabilities of JP¥4.52b falling due after that. Offsetting these obligations, it had cash of JP¥12.4b as well as receivables valued at JP¥22.5b due within 12 months. So it actually has JP¥3.58b more liquid assets than total liabilities.

This excess liquidity suggests that Narasaki Sangyo is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Narasaki Sangyo has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Narasaki Sangyo grew its EBIT by 12% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Narasaki Sangyo will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Narasaki Sangyo 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 most recent three years, Narasaki Sangyo recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Narasaki Sangyo has net cash of JP¥10.6b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥2.8b, being 76% of its EBIT. So is Narasaki Sangyo's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Narasaki Sangyo , and understanding them should be part of your investment process.

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.