NCD (TSE:4783) Could Easily Take On More 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies NCD Co., Ltd. (TSE:4783) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for NCD

What Is NCD's Net Debt?

As you can see below, NCD had JP¥850.0m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have JP¥6.12b in cash offsetting this, leading to net cash of JP¥5.27b.

How Healthy Is NCD's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that NCD had liabilities of JP¥5.23b due within 12 months and liabilities of JP¥2.51b due beyond that. On the other hand, it had cash of JP¥6.12b and JP¥3.82b worth of receivables due within a year. So it actually has JP¥2.21b more liquid assets than total liabilities.

This short term liquidity is a sign that NCD could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that NCD has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that NCD has boosted its EBIT by 65%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since NCD will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While NCD 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. During the last three years, NCD produced sturdy free cash flow equating to 63% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case NCD has JP¥5.27b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 65% over the last year. So is NCD'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. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with NCD .

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.