Nissin Foods HoldingsLtd (TSE:2897) Could Easily Take On More Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Nissin Foods Holdings Co.,Ltd. (TSE:2897) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Nissin Foods HoldingsLtd

What Is Nissin Foods HoldingsLtd's Net Debt?

The image below, which you can click on for greater detail, shows that Nissin Foods HoldingsLtd had debt of JP¥37.0b at the end of December 2023, a reduction from JP¥41.1b over a year. However, its balance sheet shows it holds JP¥109.9b in cash, so it actually has JP¥73.0b net cash.

How Healthy Is Nissin Foods HoldingsLtd's Balance Sheet?

We can see from the most recent balance sheet that Nissin Foods HoldingsLtd had liabilities of JP¥204.8b falling due within a year, and liabilities of JP¥65.1b due beyond that. On the other hand, it had cash of JP¥109.9b and JP¥121.7b worth of receivables due within a year. So it has liabilities totalling JP¥38.3b more than its cash and near-term receivables, combined.

Given Nissin Foods HoldingsLtd has a market capitalization of JP¥1.26t, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

On top of that, Nissin Foods HoldingsLtd grew its EBIT by 31% over the last twelve months, and that growth will make it easier to handle its debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. Over the most recent three years, Nissin Foods HoldingsLtd recorded free cash flow worth 74% 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

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¥73.0b. And we liked the look of last year's 31% year-on-year EBIT growth. So is Nissin Foods HoldingsLtd's debt a risk? It doesn't seem so to us. 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. Be aware that Nissin Foods HoldingsLtd is showing 1 warning sign in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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

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.