Nippon Information Development (TSE:2349) Could Easily Take On More Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Nippon Information Development Co., Ltd. (TSE:2349) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Nippon Information Development

What Is Nippon Information Development's Net Debt?

The chart below, which you can click on for greater detail, shows that Nippon Information Development had JP¥360.0m in debt in June 2024; about the same as the year before. However, it does have JP¥15.2b in cash offsetting this, leading to net cash of JP¥14.9b.

How Healthy Is Nippon Information Development's Balance Sheet?

The latest balance sheet data shows that Nippon Information Development had liabilities of JP¥3.44b due within a year, and liabilities of JP¥3.21b falling due after that. Offsetting these obligations, it had cash of JP¥15.2b as well as receivables valued at JP¥3.16b due within 12 months. So it actually has JP¥11.7b more liquid assets than total liabilities.

This luscious liquidity implies that Nippon Information Development's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Nippon Information Development has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Nippon Information Development grew its EBIT at 12% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Nippon Information Development's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Nippon Information Development 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 most recent three years, Nippon Information Development recorded free cash flow worth 70% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Nippon Information Development has net cash of JP¥14.9b, as well as more liquid assets than liabilities. The cherry on top was that in converted 70% of that EBIT to free cash flow, bringing in JP¥1.8b. So we don't think Nippon Information Development's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Nippon Information Development, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.