We Think ROHM (TSE:6963) Has A Fair Chunk Of Debt

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.' 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 ROHM Co., Ltd. (TSE:6963) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

We've discovered 4 warning signs about ROHM. View them for free.

Why Does Debt Bring Risk?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is ROHM's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 ROHM had JP¥400.0b of debt, an increase on JP¥340.2b, over one year. However, because it has a cash reserve of JP¥275.7b, its net debt is less, at about JP¥124.3b.

How Strong Is ROHM's Balance Sheet?

According to the last reported balance sheet, ROHM had liabilities of JP¥209.4b due within 12 months, and liabilities of JP¥342.8b due beyond 12 months. Offsetting these obligations, it had cash of JP¥275.7b as well as receivables valued at JP¥90.9b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥185.6b.

While this might seem like a lot, it is not so bad since ROHM has a market capitalization of JP¥510.5b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if ROHM can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Check out our latest analysis for ROHM

In the last year ROHM had a loss before interest and tax, and actually shrunk its revenue by 3.3%, to JP¥457b. We would much prefer see growth.

Caveat Emptor

Importantly, ROHM had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at JP¥8.4b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled JP¥84b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for ROHM you should be aware of, and 1 of them is a bit concerning.

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.