We Think Nitto Denko (TSE:6988) Can Manage Its Debt With Ease

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Nitto Denko Corporation (TSE:6988) does use debt in its business. But the real question is whether this debt is making the company risky.

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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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Nitto Denko's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2025 Nitto Denko had JP¥455.0m of debt, an increase on JP¥345.0m, over one year. However, its balance sheet shows it holds JP¥363.3b in cash, so it actually has JP¥362.9b net cash.

A Look At Nitto Denko's Liabilities

We can see from the most recent balance sheet that Nitto Denko had liabilities of JP¥221.7b falling due within a year, and liabilities of JP¥55.1b due beyond that. Offsetting this, it had JP¥363.3b in cash and JP¥210.4b in receivables that were due within 12 months. So it can boast JP¥297.0b more liquid assets than total liabilities.

This excess liquidity suggests that Nitto Denko is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Nitto Denko has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Nitto Denko

In addition to that, we're happy to report that Nitto Denko has boosted its EBIT by 34%, thus reducing the spectre of future debt repayments. 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 Nitto Denko can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Nitto Denko has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Nitto Denko recorded free cash flow worth 68% 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 Nitto Denko has JP¥362.9b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 34% over the last year. So is Nitto Denko's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Nitto Denko , and understanding them should be part of your investment process.

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.