Does Nisshin Seifun Group (TSE:2002) Have A Healthy Balance Sheet?

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.' 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. Importantly, Nisshin Seifun Group Inc. (TSE:2002) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Nisshin Seifun Group

What Is Nisshin Seifun Group's Net Debt?

As you can see below, Nisshin Seifun Group had JP¥43.2b of debt at June 2024, down from JP¥48.0b a year prior. However, its balance sheet shows it holds JP¥106.6b in cash, so it actually has JP¥63.4b net cash.

How Healthy Is Nisshin Seifun Group's Balance Sheet?

The latest balance sheet data shows that Nisshin Seifun Group had liabilities of JP¥154.5b due within a year, and liabilities of JP¥148.1b falling due after that. On the other hand, it had cash of JP¥106.6b and JP¥116.2b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥79.8b.

Of course, Nisshin Seifun Group has a market capitalization of JP¥536.7b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Nisshin Seifun Group boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Nisshin Seifun Group grew its EBIT by 37% 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 ultimately the future profitability of the business will decide if Nisshin Seifun Group 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Nisshin Seifun Group 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, Nisshin Seifun Group recorded free cash flow worth 62% 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 Nisshin Seifun Group does have more liabilities than liquid assets, it also has net cash of JP¥63.4b. And we liked the look of last year's 37% year-on-year EBIT growth. So we don't think Nisshin Seifun Group's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Nisshin Seifun Group, you may well want to click here to check an interactive graph of its earnings per share history.

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.