These 4 Measures Indicate That Nihon SeimaLtd (TSE:3306) Is Using Debt Reasonably Well

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, The Nihon Seima Co.,Ltd. (TSE:3306) does carry debt. But the real question is whether this debt is making the company risky.

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When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Nihon SeimaLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2025 Nihon SeimaLtd had JP¥1.01b of debt, an increase on JP¥732.0m, over one year. But on the other hand it also has JP¥1.95b in cash, leading to a JP¥947.0m net cash position.

How Healthy Is Nihon SeimaLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nihon SeimaLtd had liabilities of JP¥1.41b due within 12 months and liabilities of JP¥572.0m due beyond that. Offsetting this, it had JP¥1.95b in cash and JP¥628.0m in receivables that were due within 12 months. So it can boast JP¥604.0m more liquid assets than total liabilities.

This surplus suggests that Nihon SeimaLtd is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Nihon SeimaLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Nihon SeimaLtd

On the other hand, Nihon SeimaLtd's EBIT dived 16%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Nihon SeimaLtd will need earnings to service that debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Nihon SeimaLtd 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 last three years, Nihon SeimaLtd reported free cash flow worth 4.4% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Nihon SeimaLtd has net cash of JP¥947.0m, as well as more liquid assets than liabilities. So we are not troubled with Nihon SeimaLtd's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Nihon SeimaLtd (including 1 which can't be ignored) .

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.