Is Nissin Foods HoldingsLtd (TSE:2897) 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. We can see that Nissin Foods Holdings Co.,Ltd. (TSE:2897) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Nissin Foods HoldingsLtd

What Is Nissin Foods HoldingsLtd's Net Debt?

The chart below, which you can click on for greater detail, shows that Nissin Foods HoldingsLtd had JP¥34.9b in debt in March 2024; about the same as the year before. However, its balance sheet shows it holds JP¥115.4b in cash, so it actually has JP¥80.6b net cash.

How Strong Is Nissin Foods HoldingsLtd's Balance Sheet?

According to the last reported balance sheet, Nissin Foods HoldingsLtd had liabilities of JP¥213.5b due within 12 months, and liabilities of JP¥63.9b due beyond 12 months. Offsetting these obligations, it had cash of JP¥115.4b as well as receivables valued at JP¥117.6b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥44.4b.

Of course, Nissin Foods HoldingsLtd has a market capitalization of JP¥1.33t, 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, Nissin Foods HoldingsLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Nissin Foods HoldingsLtd grew its EBIT by 28% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Nissin Foods HoldingsLtd'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Nissin Foods HoldingsLtd 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, Nissin Foods HoldingsLtd produced sturdy free cash flow equating to 65% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Nissin Foods HoldingsLtd's liabilities, but we can be reassured by the fact it has has net cash of JP¥80.6b. And we liked the look of last year's 28% year-on-year EBIT growth. So is Nissin Foods HoldingsLtd'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 Nissin Foods HoldingsLtd's earnings per share history for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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