Is NEC Networks & System Integration (TSE:1973) Using Too Much 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. Importantly, NEC Networks & System Integration Corporation (TSE:1973) does carry debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

Check out our latest analysis for NEC Networks & System Integration

What Is NEC Networks & System Integration's Debt?

You can click the graphic below for the historical numbers, but it shows that NEC Networks & System Integration had JP¥8.35b of debt in September 2024, down from JP¥10.7b, one year before. But on the other hand it also has JP¥93.7b in cash, leading to a JP¥85.4b 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¥88.8b falling due within a year, and liabilities of JP¥31.5b due beyond that. On the other hand, it had cash of JP¥93.7b and JP¥107.1b worth of receivables due within a year. So it can boast JP¥80.5b more liquid assets than total liabilities.

It's good to see that NEC Networks & System Integration 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. 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.

The good news is that NEC Networks & System Integration has increased its EBIT by 9.8% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While NEC Networks & System Integration has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, NEC Networks & System Integration recorded free cash flow worth 64% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

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¥85.4b, as well as more liquid assets than liabilities. So is NEC Networks & System Integration's debt a risk? It doesn't seem so to us. 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.

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.