We Think Densan (TSE:3640) Can Manage Its Debt With Ease

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. As with many other companies Densan Co., Ltd. (TSE:3640) makes use of debt. But the more important question is: how much risk is that debt creating?

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When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

What Is Densan's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Densan had JP¥2.42b of debt in March 2025, down from JP¥3.47b, one year before. But it also has JP¥2.55b in cash to offset that, meaning it has JP¥129.0m net cash.

How Healthy Is Densan's Balance Sheet?

According to the last reported balance sheet, Densan had liabilities of JP¥6.39b due within 12 months, and liabilities of JP¥2.37b due beyond 12 months. On the other hand, it had cash of JP¥2.55b and JP¥7.79b worth of receivables due within a year. So it actually has JP¥1.59b more liquid assets than total liabilities.

This surplus suggests that Densan has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Densan has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Densan

In addition to that, we're happy to report that Densan has boosted its EBIT by 95%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Densan will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Densan 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. During the last three years, Densan produced sturdy free cash flow equating to 60% of its EBIT, about what we'd expect. 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 Densan has net cash of JP¥129.0m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 95% over the last year. So we don't think Densan's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Densan you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.