Japan Electronic Materials (TSE:6855) Seems To Use Debt Rather Sparingly

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 the real question is whether this debt is making the company risky.

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What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

How Much Debt Does Japan Electronic Materials Carry?

As you can see below, Japan Electronic Materials had JP¥4.85b of debt at December 2024, down from JP¥5.10b a year prior. But on the other hand it also has JP¥11.3b in cash, leading to a JP¥6.44b net cash position.

How Healthy Is Japan Electronic Materials' Balance Sheet?

We can see from the most recent balance sheet that Japan Electronic Materials had liabilities of JP¥5.06b falling due within a year, and liabilities of JP¥3.90b due beyond that. On the other hand, it had cash of JP¥11.3b and JP¥7.07b worth of receivables due within a year. So it can boast JP¥9.39b more liquid assets than total liabilities.

This surplus strongly suggests that Japan Electronic Materials has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Japan Electronic Materials has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Japan Electronic Materials

Better yet, Japan Electronic Materials grew its EBIT by 337% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. 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. While Japan Electronic Materials 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. Looking at the most recent three years, Japan Electronic Materials recorded free cash flow of 46% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Japan Electronic Materials has JP¥6.44b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 337% over the last year. 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. Case in point: We've spotted 2 warning signs for Japan Electronic Materials you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.