NOF (TSE:4403) Seems To Use Debt Rather Sparingly

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. As with many other companies NOF Corporation (TSE:4403) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See our latest analysis for NOF

What Is NOF's Net Debt?

The image below, which you can click on for greater detail, shows that NOF had debt of JP¥4.61b at the end of December 2023, a reduction from JP¥4.95b over a year. But it also has JP¥83.2b in cash to offset that, meaning it has JP¥78.6b net cash.

How Healthy Is NOF's Balance Sheet?

According to the last reported balance sheet, NOF had liabilities of JP¥49.6b due within 12 months, and liabilities of JP¥20.1b due beyond 12 months. Offsetting this, it had JP¥83.2b in cash and JP¥54.0b in receivables that were due within 12 months. So it can boast JP¥67.5b more liquid assets than total liabilities.

This surplus suggests that NOF has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, NOF boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that NOF grew its EBIT by 17% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine NOF'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. NOF 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. Looking at the most recent three years, NOF recorded free cash flow of 47% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that NOF has net cash of JP¥78.6b, as well as more liquid assets than liabilities. And we liked the look of last year's 17% year-on-year EBIT growth. So is NOF's debt a risk? It doesn't seem so to us. 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 NOF'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.