Nippon Television Holdings (TSE:9404) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Nippon Television Holdings, Inc. (TSE:9404) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Nippon Television Holdings

What Is Nippon Television Holdings's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Nippon Television Holdings had debt of JP¥5.63b, up from JP¥3.08b in one year. But it also has JP¥170.8b in cash to offset that, meaning it has JP¥165.1b net cash.

How Strong Is Nippon Television Holdings' Balance Sheet?

We can see from the most recent balance sheet that Nippon Television Holdings had liabilities of JP¥118.3b falling due within a year, and liabilities of JP¥117.7b due beyond that. Offsetting this, it had JP¥170.8b in cash and JP¥110.3b in receivables that were due within 12 months. So it actually has JP¥45.0b more liquid assets than total liabilities.

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

On the other hand, Nippon Television Holdings's EBIT dived 10%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 Nippon Television Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Nippon Television Holdings 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, Nippon Television Holdings recorded free cash flow worth 78% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Nippon Television Holdings has net cash of JP¥165.1b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥35b, being 78% of its EBIT. So we don't think Nippon Television Holdings's use of debt is risky. 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 Nippon Television Holdings'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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com