Is Nishimoto (TSE:9260) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Nishimoto Co., Ltd. (TSE:9260) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Nishimoto

How Much Debt Does Nishimoto Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Nishimoto had debt of JP¥88.3b, up from JP¥67.0b in one year. However, it does have JP¥97.8b in cash offsetting this, leading to net cash of JP¥9.54b.

A Look At Nishimoto's Liabilities

According to the last reported balance sheet, Nishimoto had liabilities of JP¥58.3b due within 12 months, and liabilities of JP¥80.8b due beyond 12 months. Offsetting these obligations, it had cash of JP¥97.8b as well as receivables valued at JP¥34.1b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥7.16b.

Of course, Nishimoto has a market capitalization of JP¥46.1b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Nishimoto also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the bad news is that Nishimoto has seen its EBIT plunge 14% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But it is Nishimoto's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Nishimoto 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, Nishimoto's free cash flow amounted to 48% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

Although Nishimoto'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¥9.54b. So we don't have any problem with Nishimoto'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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Nishimoto you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com