Is Osaka Steel (TSE:5449) Using Too Much Debt?

Warren Buffett famously said, '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. We can see that Osaka Steel Co., Ltd. (TSE:5449) does use debt in its business. But is this debt a concern to shareholders?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Osaka Steel

What Is Osaka Steel's Debt?

You can click the graphic below for the historical numbers, but it shows that Osaka Steel had JP¥14.6b of debt in June 2024, down from JP¥31.4b, one year before. However, its balance sheet shows it holds JP¥37.9b in cash, so it actually has JP¥23.3b net cash.

How Strong Is Osaka Steel's Balance Sheet?

According to the last reported balance sheet, Osaka Steel had liabilities of JP¥43.5b due within 12 months, and liabilities of JP¥5.18b due beyond 12 months. On the other hand, it had cash of JP¥37.9b and JP¥42.3b worth of receivables due within a year. So it can boast JP¥31.6b more liquid assets than total liabilities.

This surplus suggests that Osaka Steel is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Osaka Steel has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Osaka Steel saw its EBIT decline by 6.0% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Osaka Steel will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Osaka Steel 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 last three years, Osaka Steel saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Osaka Steel has net cash of JP¥23.3b, as well as more liquid assets than liabilities. So we are not troubled with Osaka Steel's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Osaka Steel has 1 warning sign we think you should be aware of.

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.