Is Mitsubishi Pencil (TSE:7976) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Mitsubishi Pencil Co., Ltd. (TSE:7976) does use debt in its business. But is this debt a concern to shareholders?

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What Risk Does Debt Bring?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Mitsubishi Pencil's Debt?

You can click the graphic below for the historical numbers, but it shows that Mitsubishi Pencil had JP¥10.8b of debt in June 2025, down from JP¥18.0b, one year before. But on the other hand it also has JP¥34.1b in cash, leading to a JP¥23.3b net cash position.

A Look At Mitsubishi Pencil's Liabilities

The latest balance sheet data shows that Mitsubishi Pencil had liabilities of JP¥17.8b due within a year, and liabilities of JP¥21.5b falling due after that. Offsetting these obligations, it had cash of JP¥34.1b as well as receivables valued at JP¥17.6b due within 12 months. So it actually has JP¥12.3b more liquid assets than total liabilities.

This short term liquidity is a sign that Mitsubishi Pencil could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Mitsubishi Pencil has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Mitsubishi Pencil

Fortunately, Mitsubishi Pencil grew its EBIT by 2.6% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Mitsubishi Pencil can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Mitsubishi Pencil has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Mitsubishi Pencil recorded free cash flow of 35% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Mitsubishi Pencil has net cash of JP¥23.3b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 2.6% in the last twelve months. So we don't have any problem with Mitsubishi Pencil's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Mitsubishi Pencil .

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.