Broadcasting System of Niigata (TYO:9408) Seems To Use Debt Rather Sparingly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Broadcasting System of Niigata Inc. (TYO:9408) does carry debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Broadcasting System of Niigata

How Much Debt Does Broadcasting System of Niigata Carry?

As you can see below, Broadcasting System of Niigata had JP¥376.0m of debt at December 2020, down from JP¥457.0m a year prior. However, it does have JP¥6.20b in cash offsetting this, leading to net cash of JP¥5.82b.

How Healthy Is Broadcasting System of Niigata's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Broadcasting System of Niigata had liabilities of JP¥4.77b due within 12 months and liabilities of JP¥1.03b due beyond that. Offsetting these obligations, it had cash of JP¥6.20b as well as receivables valued at JP¥3.28b due within 12 months. So it actually has JP¥3.68b more liquid assets than total liabilities.

This surplus liquidity suggests that Broadcasting System of Niigata's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Broadcasting System of Niigata boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Broadcasting System of Niigata's load is not too heavy, because its EBIT was down 42% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is Broadcasting System of Niigata's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Broadcasting System of Niigata 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 last three years, Broadcasting System of Niigata actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case Broadcasting System of Niigata has JP¥5.82b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥1.4b, being 122% of its EBIT. So we don't think Broadcasting System of Niigata'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. For instance, we've identified 4 warning signs for Broadcasting System of Niigata (1 makes us a bit uncomfortable) 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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