Does Advantest (TSE:6857) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Advantest Corporation (TSE:6857) does use debt in its business. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Advantest Carry?

As you can see below, Advantest had JP¥75.0b of debt, at March 2025, which is about the same as the year before. You can click the chart for greater detail. However, it does have JP¥262.5b in cash offsetting this, leading to net cash of JP¥187.6b.

A Look At Advantest's Liabilities

Zooming in on the latest balance sheet data, we can see that Advantest had liabilities of JP¥309.4b due within 12 months and liabilities of JP¥38.2b due beyond that. Offsetting this, it had JP¥262.5b in cash and JP¥113.0b in receivables that were due within 12 months. So it actually has JP¥27.9b more liquid assets than total liabilities.

Having regard to Advantest's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the JP¥6.08t company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Advantest has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Advantest

Better yet, Advantest grew its EBIT by 152% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Advantest 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. Advantest 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 most recent three years, Advantest recorded free cash flow worth 67% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Advantest has net cash of JP¥187.6b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 152% over the last year. So we don't think Advantest's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Advantest you should be aware of.

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.