We Think NSD (TSE:9759) Can Manage Its Debt With Ease

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 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. Importantly, NSD Co., Ltd. (TSE:9759) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for NSD

What Is NSD's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 NSD had JP¥3.34b of debt, an increase on none, over one year. But it also has JP¥27.3b in cash to offset that, meaning it has JP¥24.0b net cash.

How Healthy Is NSD's Balance Sheet?

According to the last reported balance sheet, NSD had liabilities of JP¥13.9b due within 12 months, and liabilities of JP¥6.81b due beyond 12 months. Offsetting this, it had JP¥27.3b in cash and JP¥17.2b in receivables that were due within 12 months. So it actually has JP¥23.9b 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. Simply put, the fact that NSD has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that NSD grew its EBIT by 17% last year, making its debt load easier to handle. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. NSD 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, NSD recorded free cash flow worth 68% 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 NSD has net cash of JP¥24.0b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥8.9b, being 68% of its EBIT. So is NSD's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in NSD, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.