These 4 Measures Indicate That Yashima Denki (TSE:3153) Is Using Debt Safely

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.' 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, Yashima Denki Co., Ltd. (TSE:3153) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Yashima Denki

What Is Yashima Denki's Net Debt?

The image below, which you can click on for greater detail, shows that Yashima Denki had debt of JP¥900.0m at the end of March 2024, a reduction from JP¥1.21b over a year. But on the other hand it also has JP¥13.1b in cash, leading to a JP¥12.2b net cash position.

How Strong Is Yashima Denki's Balance Sheet?

We can see from the most recent balance sheet that Yashima Denki had liabilities of JP¥32.3b falling due within a year, and liabilities of JP¥599.0m due beyond that. Offsetting these obligations, it had cash of JP¥13.1b as well as receivables valued at JP¥30.6b due within 12 months. So it can boast JP¥10.8b more liquid assets than total liabilities.

It's good to see that Yashima Denki has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Yashima Denki boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Yashima Denki grew its EBIT by 39% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is Yashima Denki's earnings that will influence how the balance sheet holds up in the future. 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. Yashima Denki 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. Looking at the most recent three years, Yashima Denki recorded free cash flow of 47% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Yashima Denki has net cash of JP¥12.2b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 39% over the last year. So is Yashima Denki'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 Yashima Denki'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.

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