Is Yamaichi ElectronicsLtd (TSE:6941) Using Too Much Debt?

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 note that Yamaichi Electronics Co.,Ltd. (TSE:6941) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Yamaichi ElectronicsLtd

What Is Yamaichi ElectronicsLtd's Net Debt?

As you can see below, Yamaichi ElectronicsLtd had JP¥3.27b of debt at June 2024, down from JP¥3.73b a year prior. However, it does have JP¥13.5b in cash offsetting this, leading to net cash of JP¥10.3b.

How Healthy Is Yamaichi ElectronicsLtd's Balance Sheet?

The latest balance sheet data shows that Yamaichi ElectronicsLtd had liabilities of JP¥10.7b due within a year, and liabilities of JP¥3.63b falling due after that. Offsetting this, it had JP¥13.5b in cash and JP¥11.1b in receivables that were due within 12 months. So it actually has JP¥10.4b more liquid assets than total liabilities.

It's good to see that Yamaichi ElectronicsLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Yamaichi ElectronicsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

While Yamaichi ElectronicsLtd doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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 Yamaichi ElectronicsLtd'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Yamaichi ElectronicsLtd 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, Yamaichi ElectronicsLtd's free cash flow amounted to 44% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Yamaichi ElectronicsLtd has JP¥10.3b in net cash and a decent-looking balance sheet. So we don't think Yamaichi ElectronicsLtd's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Yamaichi ElectronicsLtd has 2 warning signs we think 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.