These 4 Measures Indicate That Nihon M&A Center Holdings (TSE:2127) Is Using Debt Safely

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Nihon M&A Center Holdings Inc. (TSE:2127) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Nihon M&A Center Holdings

What Is Nihon M&A Center Holdings's Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Nihon M&A Center Holdings had debt of JP¥6.30b, up from none in one year. But on the other hand it also has JP¥42.2b in cash, leading to a JP¥35.9b net cash position.

How Healthy Is Nihon M&A Center Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nihon M&A Center Holdings had liabilities of JP¥6.57b due within 12 months and liabilities of JP¥5.07b due beyond that. On the other hand, it had cash of JP¥42.2b and JP¥1.15b worth of receivables due within a year. So it actually has JP¥31.7b more liquid assets than total liabilities.

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

Also positive, Nihon M&A Center Holdings grew its EBIT by 28% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Nihon M&A Center Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Nihon M&A Center Holdings 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, Nihon M&A Center Holdings recorded free cash flow worth 58% 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 Nihon M&A Center Holdings has net cash of JP¥35.9b, as well as more liquid assets than liabilities. And we liked the look of last year's 28% year-on-year EBIT growth. So we don't think Nihon M&A Center Holdings's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Nihon M&A Center Holdings 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.