We Think Nisshin Seifun Group (TSE:2002) Can Manage Its Debt With Ease

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.' 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 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Nisshin Seifun Group

How Much Debt Does Nisshin Seifun Group Carry?

As you can see below, Nisshin Seifun Group had JP¥47.1b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has JP¥109.5b in cash, leading to a JP¥62.4b net cash position.

A Look At Nisshin Seifun Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Nisshin Seifun Group had liabilities of JP¥163.6b due within 12 months and liabilities of JP¥146.8b due beyond that. Offsetting these obligations, it had cash of JP¥109.5b as well as receivables valued at JP¥114.0b due within 12 months. So its liabilities total JP¥86.9b more than the combination of its cash and short-term receivables.

Given Nisshin Seifun Group has a market capitalization of JP¥542.8b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Nisshin Seifun Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Nisshin Seifun Group has boosted its EBIT by 46%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Nisshin Seifun Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. During the last three years, Nisshin Seifun Group produced sturdy free cash flow equating to 65% of its EBIT, about what we'd expect. 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¥62.4b. And we liked the look of last year's 46% year-on-year EBIT growth. So is Nisshin Seifun Group's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Nisshin Seifun Group's earnings per share history for free.

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