Here's Why Japan Electronic Materials (TSE:6855) Can Manage Its Debt Responsibly

Warren Buffett famously said, '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. As with many other companies Japan Electronic Materials Corporation (TSE:6855) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Japan Electronic Materials

How Much Debt Does Japan Electronic Materials Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Japan Electronic Materials had JP¥5.10b of debt, an increase on JP¥4.57b, over one year. However, it does have JP¥12.4b in cash offsetting this, leading to net cash of JP¥7.29b.

How Strong Is Japan Electronic Materials' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Japan Electronic Materials had liabilities of JP¥4.53b due within 12 months and liabilities of JP¥3.96b due beyond that. Offsetting these obligations, it had cash of JP¥12.4b as well as receivables valued at JP¥7.14b due within 12 months. So it can boast JP¥11.1b more liquid assets than total liabilities.

This excess liquidity is a great indication that Japan Electronic Materials' 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, Japan Electronic Materials boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Japan Electronic Materials's load is not too heavy, because its EBIT was down 73% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Japan Electronic Materials's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Japan Electronic Materials 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. Happily for any shareholders, Japan Electronic Materials actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Japan Electronic Materials has JP¥7.29b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥3.2b, being 104% of its EBIT. So we don't think Japan Electronic Materials's use of debt is risky. 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 Japan Electronic Materials is showing 3 warning signs in our investment analysis , and 1 of those can't be ignored...

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. 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.