Does Naigai Tec (TYO:3374) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Naigai Tec Corporation (TYO:3374) does use debt in its business. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Naigai Tec

What Is Naigai Tec's Debt?

As you can see below, Naigai Tec had JP¥2.82b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has JP¥5.06b in cash, leading to a JP¥2.24b net cash position.

How Strong Is Naigai Tec's Balance Sheet?

The latest balance sheet data shows that Naigai Tec had liabilities of JP¥7.18b due within a year, and liabilities of JP¥3.19b falling due after that. Offsetting this, it had JP¥5.06b in cash and JP¥5.49b in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

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

Even more impressive was the fact that Naigai Tec grew its EBIT by 156% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Naigai Tec will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Naigai Tec 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, Naigai Tec 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 Naigai Tec has net cash of JP¥2.24b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 156% over the last year. So we are not troubled with Naigai Tec's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Naigai Tec (1 shouldn't be ignored!) that you should be aware of before investing here.

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. 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.
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