These 4 Measures Indicate That Nikon (TSE:7731) Is Using Debt Extensively

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Nikon Corporation (TSE:7731) does use debt in its business. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Nikon

How Much Debt Does Nikon Carry?

As you can see below, Nikon had JP¥136.0b of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have JP¥197.8b in cash offsetting this, leading to net cash of JP¥61.8b.

How Strong Is Nikon's Balance Sheet?

According to the last reported balance sheet, Nikon had liabilities of JP¥317.1b due within 12 months, and liabilities of JP¥128.2b due beyond 12 months. Offsetting these obligations, it had cash of JP¥197.8b as well as receivables valued at JP¥129.3b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥118.2b.

Nikon has a market capitalization of JP¥520.0b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Nikon also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Nikon's EBIT dived 17%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Nikon'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. While Nikon 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. During the last three years, Nikon burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

Although Nikon's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of JP¥61.8b. So although we see some areas for improvement, we're not too worried about Nikon's balance sheet. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Nikon you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.