We Think NIC Autotec (TYO:5742) Can Stay On Top Of Its 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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that NIC Autotec, Inc. (TYO:5742) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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.

View our latest analysis for NIC Autotec

How Much Debt Does NIC Autotec Carry?

The chart below, which you can click on for greater detail, shows that NIC Autotec had JP¥1.11b in debt in December 2020; about the same as the year before. But on the other hand it also has JP¥1.27b in cash, leading to a JP¥154.0m net cash position.

A Look At NIC Autotec's Liabilities

Zooming in on the latest balance sheet data, we can see that NIC Autotec had liabilities of JP¥1.83b due within 12 months and liabilities of JP¥1.40b due beyond that. On the other hand, it had cash of JP¥1.27b and JP¥2.22b worth of receivables due within a year. So it actually has JP¥249.0m more liquid assets than total liabilities.

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

On the other hand, NIC Autotec's EBIT dived 13%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But it is NIC Autotec's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While NIC Autotec 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, NIC Autotec recorded free cash flow worth 55% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case NIC Autotec has JP¥154.0m in net cash and a decent-looking balance sheet. So we don't have any problem with NIC Autotec's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for NIC Autotec you should be aware of, and 1 of them makes us a bit uncomfortable.

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.

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This article by Simply Wall St is general in nature. 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.
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