Is NEC Networks & System Integration (TSE:1973) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies NEC Networks & System Integration Corporation (TSE:1973) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for NEC Networks & System Integration

How Much Debt Does NEC Networks & System Integration Carry?

As you can see below, NEC Networks & System Integration had JP¥9.23b of debt at March 2024, down from JP¥11.9b a year prior. But on the other hand it also has JP¥73.5b in cash, leading to a JP¥64.3b net cash position.

A Look At NEC Networks & System Integration's Liabilities

We can see from the most recent balance sheet that NEC Networks & System Integration had liabilities of JP¥96.8b falling due within a year, and liabilities of JP¥30.6b due beyond that. Offsetting this, it had JP¥73.5b in cash and JP¥100.1b in receivables that were due within 12 months. So it actually has JP¥46.2b more liquid assets than total liabilities.

This surplus suggests that NEC Networks & System Integration has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that NEC Networks & System Integration has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that NEC Networks & System Integration grew its EBIT at 10% over the last year, further increasing its ability to manage 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 NEC Networks & System Integration 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. NEC Networks & System Integration 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, NEC Networks & System Integration's free cash flow amounted to 49% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that NEC Networks & System Integration has net cash of JP¥64.3b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 10% in the last twelve months. So we don't think NEC Networks & System Integration's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in NEC Networks & System Integration, you may well want to click here to check an interactive graph of its earnings per share history.

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.