These 4 Measures Indicate That NEC Networks & System Integration (TSE:1973) Is Using Debt Reasonably Well

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.' 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 the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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

How Much Debt Does NEC Networks & System Integration Carry?

You can click the graphic below for the historical numbers, but it shows that NEC Networks & System Integration had JP¥9.54b of debt in December 2023, down from JP¥11.9b, one year before. But on the other hand it also has JP¥57.8b in cash, leading to a JP¥48.2b net cash position.

How Strong Is NEC Networks & System Integration's Balance Sheet?

The latest balance sheet data shows that NEC Networks & System Integration had liabilities of JP¥75.0b due within a year, and liabilities of JP¥33.6b falling due after that. Offsetting this, it had JP¥57.8b in cash and JP¥121.6b in receivables that were due within 12 months. So it actually has JP¥70.8b 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. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, NEC Networks & System Integration boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that NEC Networks & System Integration has increased its EBIT by 8.3% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. 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 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. 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 26% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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¥48.2b, as well as more liquid assets than liabilities. And it also grew its EBIT by 8.3% over the last year. So is NEC Networks & System Integration's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for NEC Networks & System Integration you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.