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

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.' 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 JVCKENWOOD Corporation (TSE:6632) makes use of debt. But should shareholders be worried about its use of debt?

We've discovered 1 warning sign about JVCKENWOOD. View them for free.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does JVCKENWOOD Carry?

As you can see below, JVCKENWOOD had JP¥50.5b of debt at December 2024, down from JP¥58.8b a year prior. But it also has JP¥54.8b in cash to offset that, meaning it has JP¥4.33b net cash.

How Strong Is JVCKENWOOD's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that JVCKENWOOD had liabilities of JP¥129.0b due within 12 months and liabilities of JP¥61.2b due beyond that. Offsetting these obligations, it had cash of JP¥54.8b as well as receivables valued at JP¥72.2b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥63.2b.

While this might seem like a lot, it is not so bad since JVCKENWOOD has a market capitalization of JP¥149.9b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, JVCKENWOOD boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for JVCKENWOOD

On top of that, JVCKENWOOD grew its EBIT by 98% over the last twelve months, and that growth will make it easier to handle its debt. 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 JVCKENWOOD'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.

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. Over the most recent three years, JVCKENWOOD recorded free cash flow worth 67% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While JVCKENWOOD does have more liabilities than liquid assets, it also has net cash of JP¥4.33b. And we liked the look of last year's 98% year-on-year EBIT growth. So is JVCKENWOOD's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for JVCKENWOOD you should be aware of.

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.