Does AOI Electronics (TSE:6832) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that AOI Electronics Co., Ltd. (TSE:6832) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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 step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does AOI Electronics Carry?

As you can see below, at the end of June 2025, AOI Electronics had JP¥1.61b of debt, up from JP¥1.13b a year ago. Click the image for more detail. However, it does have JP¥17.5b in cash offsetting this, leading to net cash of JP¥15.9b.

How Strong Is AOI Electronics' Balance Sheet?

The latest balance sheet data shows that AOI Electronics had liabilities of JP¥7.12b due within a year, and liabilities of JP¥1.30b falling due after that. Offsetting this, it had JP¥17.5b in cash and JP¥9.34b in receivables that were due within 12 months. So it actually has JP¥18.4b more liquid assets than total liabilities.

This excess liquidity is a great indication that AOI Electronics' balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, AOI Electronics boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for AOI Electronics

Although AOI Electronics made a loss at the EBIT level, last year, it was also good to see that it generated JP¥269m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if AOI Electronics 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. AOI Electronics 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. During the last year, AOI Electronics burned a lot of cash. 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 it is always sensible to investigate a company's debt, in this case AOI Electronics has JP¥15.9b in net cash and a decent-looking balance sheet. So we are not troubled with AOI Electronics's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that AOI Electronics is showing 1 warning sign in our investment analysis , you should know about...

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.