These 4 Measures Indicate That NOF (TSE:4403) Is Using Debt Reasonably Well

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.' 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 NOF Corporation (TSE:4403) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for NOF

How Much Debt Does NOF Carry?

The chart below, which you can click on for greater detail, shows that NOF had JP¥4.47b in debt in June 2024; about the same as the year before. However, its balance sheet shows it holds JP¥92.3b in cash, so it actually has JP¥87.8b net cash.

How Healthy Is NOF's Balance Sheet?

The latest balance sheet data shows that NOF had liabilities of JP¥52.6b due within a year, and liabilities of JP¥21.6b falling due after that. Offsetting this, it had JP¥92.3b in cash and JP¥53.3b in receivables that were due within 12 months. So it can boast JP¥71.4b more liquid assets than total liabilities.

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

Also good is that NOF grew its EBIT at 18% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if NOF 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. In the last three years, NOF's free cash flow amounted to 39% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case NOF has JP¥87.8b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 18% over the last year. So we don't think NOF's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in NOF, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.