Is JVCKENWOOD (TSE:6632) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that JVCKENWOOD Corporation (TSE:6632) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for JVCKENWOOD

What Is JVCKENWOOD's Net Debt?

You can click the graphic below for the historical numbers, but it shows that JVCKENWOOD had JP¥51.4b of debt in June 2024, down from JP¥62.4b, one year before. But on the other hand it also has JP¥54.3b in cash, leading to a JP¥2.94b net cash position.

A Look At JVCKENWOOD's Liabilities

The latest balance sheet data shows that JVCKENWOOD had liabilities of JP¥123.8b due within a year, and liabilities of JP¥70.9b falling due after that. Offsetting this, it had JP¥54.3b in cash and JP¥67.8b in receivables that were due within 12 months. So it has liabilities totalling JP¥72.6b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since JVCKENWOOD has a market capitalization of JP¥200.0b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, JVCKENWOOD also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, JVCKENWOOD grew its EBIT by 3.2% 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 JVCKENWOOD 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. JVCKENWOOD 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. In the last three years, JVCKENWOOD's free cash flow amounted to 43% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While JVCKENWOOD does have more liabilities than liquid assets, it also has net cash of JP¥2.94b. And it also grew its EBIT by 3.2% over the last year. So we don't have any problem with JVCKENWOOD's use of debt. 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. For example, we've discovered 1 warning sign for JVCKENWOOD that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.