NIPPON PARKING DEVELOPMENTLtd (TSE:2353) Has A Pretty Healthy Balance Sheet

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies NIPPON PARKING DEVELOPMENT Co.,Ltd. (TSE:2353) makes use of debt. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does NIPPON PARKING DEVELOPMENTLtd Carry?

As you can see below, NIPPON PARKING DEVELOPMENTLtd had JP¥16.1b of debt, at January 2025, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds JP¥16.4b in cash, so it actually has JP¥223.0m net cash.

How Strong Is NIPPON PARKING DEVELOPMENTLtd's Balance Sheet?

According to the last reported balance sheet, NIPPON PARKING DEVELOPMENTLtd had liabilities of JP¥9.82b due within 12 months, and liabilities of JP¥14.8b due beyond 12 months. Offsetting this, it had JP¥16.4b in cash and JP¥2.33b in receivables that were due within 12 months. So it has liabilities totalling JP¥5.91b more than its cash and near-term receivables, combined.

Given NIPPON PARKING DEVELOPMENTLtd has a market capitalization of JP¥69.9b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, NIPPON PARKING DEVELOPMENTLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

View our latest analysis for NIPPON PARKING DEVELOPMENTLtd

Also positive, NIPPON PARKING DEVELOPMENTLtd grew its EBIT by 24% 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 it is NIPPON PARKING DEVELOPMENTLtd'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. NIPPON PARKING DEVELOPMENTLtd 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. Looking at the most recent three years, NIPPON PARKING DEVELOPMENTLtd recorded free cash flow of 24% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that NIPPON PARKING DEVELOPMENTLtd has JP¥223.0m in net cash. And we liked the look of last year's 24% year-on-year EBIT growth. So we are not troubled with NIPPON PARKING DEVELOPMENTLtd's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for NIPPON PARKING DEVELOPMENTLtd you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.