These 4 Measures Indicate That NSD (TSE:9759) Is Using Debt Safely

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that NSD Co., Ltd. (TSE:9759) does have debt on its balance sheet. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

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. 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, 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.

What Is NSD's Debt?

The image below, which you can click on for greater detail, shows that NSD had debt of JP¥2.76b at the end of December 2024, a reduction from JP¥3.34b over a year. But it also has JP¥30.9b in cash to offset that, meaning it has JP¥28.2b net cash.

How Healthy Is NSD's Balance Sheet?

The latest balance sheet data shows that NSD had liabilities of JP¥14.5b due within a year, and liabilities of JP¥7.41b falling due after that. Offsetting these obligations, it had cash of JP¥30.9b as well as receivables valued at JP¥18.9b due within 12 months. So it can boast JP¥27.9b more liquid assets than total liabilities.

This short term liquidity is a sign that NSD could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, NSD boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for NSD

Also good is that NSD grew its EBIT at 13% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine NSD's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While NSD 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, NSD produced sturdy free cash flow equating to 76% 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 NSD has JP¥28.2b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥13b, being 76% of its EBIT. So we don't think NSD's use of debt is risky. 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 NSD's earnings per share history for free.

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.