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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that NOF Corporation (TSE:4403) does use debt in its business. But should shareholders be worried about its use of debt?

We check all companies for important risks. See what we found for NOF in our free report.

What Risk Does Debt Bring?

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 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is NOF's Debt?

The image below, which you can click on for greater detail, shows that NOF had debt of JP¥4.19b at the end of December 2024, a reduction from JP¥4.61b over a year. But it also has JP¥79.2b in cash to offset that, meaning it has JP¥75.0b net cash.

How Strong Is NOF's Balance Sheet?

We can see from the most recent balance sheet that NOF had liabilities of JP¥49.2b falling due within a year, and liabilities of JP¥20.2b due beyond that. Offsetting these obligations, it had cash of JP¥79.2b as well as receivables valued at JP¥56.3b due within 12 months. So it actually has JP¥66.1b 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!

View our latest analysis for NOF

Fortunately, NOF grew its EBIT by 2.1% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. 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 38% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case NOF has JP¥75.0b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 2.1% over the last year. So we are not troubled with NOF's debt use. 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.