Here's Why Nihon Kohden (TSE:6849) Can Manage Its Debt Responsibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Nihon Kohden Corporation (TSE:6849) does use debt in its business. But the more important question is: how much risk is that debt creating?

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When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is Nihon Kohden's Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Nihon Kohden had debt of JP¥26.0b, up from JP¥442.0m in one year. But it also has JP¥38.5b in cash to offset that, meaning it has JP¥12.6b net cash.

How Strong Is Nihon Kohden's Balance Sheet?

According to the last reported balance sheet, Nihon Kohden had liabilities of JP¥66.3b due within 12 months, and liabilities of JP¥2.27b due beyond 12 months. On the other hand, it had cash of JP¥38.5b and JP¥62.0b worth of receivables due within a year. So it can boast JP¥32.0b more liquid assets than total liabilities.

This short term liquidity is a sign that Nihon Kohden could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Nihon Kohden has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Nihon Kohden

Also good is that Nihon Kohden grew its EBIT at 19% over the last year, further increasing its ability to manage 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 Nihon Kohden 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 company can only pay off debt with cold hard cash, not accounting profits. While Nihon Kohden 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. In the last three years, Nihon Kohden created free cash flow amounting to 17% of its EBIT, an uninspiring performance. 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 Kohden has net cash of JP¥12.6b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 19% over the last year. So we don't think Nihon Kohden's use of debt is risky. 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 Nihon Kohden'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.