Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Shin-Etsu Chemical Co., Ltd. (TSE:4063) does use debt in its business. But should shareholders be worried about its use of debt?
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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Shin-Etsu Chemical's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2025 Shin-Etsu Chemical had JP¥244.8b of debt, an increase on JP¥22.7b, over one year. But on the other hand it also has JP¥1.47t in cash, leading to a JP¥1.23t net cash position.
A Look At Shin-Etsu Chemical's Liabilities
Zooming in on the latest balance sheet data, we can see that Shin-Etsu Chemical had liabilities of JP¥443.9b due within 12 months and liabilities of JP¥484.6b due beyond that. Offsetting these obligations, it had cash of JP¥1.47t as well as receivables valued at JP¥505.4b due within 12 months. So it actually has JP¥1.05t more liquid assets than total liabilities.
This short term liquidity is a sign that Shin-Etsu Chemical could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Shin-Etsu Chemical has more cash than debt is arguably a good indication that it can manage its debt safely.
See our latest analysis for Shin-Etsu Chemical
The good news is that Shin-Etsu Chemical has increased its EBIT by 2.4% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Shin-Etsu Chemical'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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Shin-Etsu Chemical may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Shin-Etsu Chemical recorded free cash flow worth 53% 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
While it is always sensible to investigate a company's debt, in this case Shin-Etsu Chemical has JP¥1.23t in net cash and a decent-looking balance sheet. So we don't think Shin-Etsu Chemical's use of debt is risky. 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. Be aware that Shin-Etsu Chemical 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.
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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.