Is SECOM (TSE:9735) 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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies SECOM CO., LTD. (TSE:9735) makes use of debt. But the real question is whether this debt is making the company risky.

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When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is SECOM's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2025 SECOM had JP¥44.4b of debt, an increase on JP¥40.9b, over one year. However, its balance sheet shows it holds JP¥584.6b in cash, so it actually has JP¥540.2b net cash.

A Look At SECOM's Liabilities

According to the last reported balance sheet, SECOM had liabilities of JP¥379.3b due within 12 months, and liabilities of JP¥318.5b due beyond 12 months. On the other hand, it had cash of JP¥584.6b and JP¥288.5b worth of receivables due within a year. So it can boast JP¥175.3b more liquid assets than total liabilities.

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

Check out our latest analysis for SECOM

The good news is that SECOM has increased its EBIT by 2.6% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine SECOM's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While SECOM 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. Over the most recent three years, SECOM recorded free cash flow worth 54% 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 SECOM has net cash of JP¥540.2b, as well as more liquid assets than liabilities. So is SECOM's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of SECOM's earnings per share history for free.

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.