Does Power Solutions (TSE:4450) Have A Healthy Balance Sheet?

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, Power Solutions, Ltd. (TSE:4450) does carry debt. But the more important question is: how much risk is that debt creating?

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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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Power Solutions Carry?

The image below, which you can click on for greater detail, shows that Power Solutions had debt of JP¥595.0m at the end of June 2025, a reduction from JP¥953.0m over a year. However, it does have JP¥1.70b in cash offsetting this, leading to net cash of JP¥1.11b.

How Strong Is Power Solutions' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Power Solutions had liabilities of JP¥1.79b due within 12 months and liabilities of JP¥422.0m due beyond that. On the other hand, it had cash of JP¥1.70b and JP¥1.44b worth of receivables due within a year. So it can boast JP¥925.0m more liquid assets than total liabilities.

This surplus suggests that Power Solutions has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Power Solutions boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Power Solutions

On top of that, Power Solutions grew its EBIT by 39% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Power Solutions'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Power Solutions 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. Looking at the most recent three years, Power Solutions recorded free cash flow of 30% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Power Solutions has JP¥1.11b in net cash and a decent-looking balance sheet. And we liked the look of last year's 39% year-on-year EBIT growth. So is Power Solutions's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Power Solutions (1 doesn't sit too well with us!) that you should be aware of before investing here.

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.