Micronics Japan (TSE:6871) Seems To Use Debt Rather Sparingly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Micronics Japan Co., Ltd. (TSE:6871) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Micronics Japan's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2025 Micronics Japan had JP¥6.88b of debt, an increase on JP¥952.0m, over one year. But on the other hand it also has JP¥20.7b in cash, leading to a JP¥13.8b net cash position.

How Strong Is Micronics Japan's Balance Sheet?

The latest balance sheet data shows that Micronics Japan had liabilities of JP¥24.7b due within a year, and liabilities of JP¥8.59b falling due after that. Offsetting this, it had JP¥20.7b in cash and JP¥9.33b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥3.26b.

This state of affairs indicates that Micronics Japan's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the JP¥208.4b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Micronics Japan boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Micronics Japan

Even more impressive was the fact that Micronics Japan grew its EBIT by 121% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Micronics Japan'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Micronics Japan 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. In the last three years, Micronics Japan's free cash flow amounted to 44% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about Micronics Japan's liabilities, but we can be reassured by the fact it has has net cash of JP¥13.8b. And it impressed us with its EBIT growth of 121% over the last year. So is Micronics Japan's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Micronics Japan has 1 warning sign we think you should be aware of.

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.