NEC (TSE:6701) Could Easily Take On More Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 NEC Corporation (TSE:6701) makes use of debt. But should shareholders be worried about its use of debt?

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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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does NEC Carry?

The image below, which you can click on for greater detail, shows that at March 2025 NEC had debt of JP¥489.7b, up from JP¥382.9b in one year. However, its balance sheet shows it holds JP¥584.6b in cash, so it actually has JP¥94.9b net cash.

How Healthy Is NEC's Balance Sheet?

We can see from the most recent balance sheet that NEC had liabilities of JP¥1.63t falling due within a year, and liabilities of JP¥617.0b due beyond that. Offsetting these obligations, it had cash of JP¥584.6b as well as receivables valued at JP¥878.4b due within 12 months. So its liabilities total JP¥780.8b more than the combination of its cash and short-term receivables.

Of course, NEC has a titanic market capitalization of JP¥5.51t, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, NEC also has more cash than debt, so we're pretty confident it can manage its debt safely.

Check out our latest analysis for NEC

In addition to that, we're happy to report that NEC has boosted its EBIT by 36%, thus reducing the spectre of future debt repayments. 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 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While NEC 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, NEC produced sturdy free cash flow equating to 71% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

Although NEC's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of JP¥94.9b. And we liked the look of last year's 36% year-on-year EBIT growth. So is NEC's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of NEC's earnings per share history for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.