Does Brother Industries (TSE:6448) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Brother Industries, Ltd. (TSE:6448) does carry debt. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Brother Industries's Debt?

The chart below, which you can click on for greater detail, shows that Brother Industries had JP¥600.0m in debt in March 2025; about the same as the year before. But it also has JP¥172.8b in cash to offset that, meaning it has JP¥172.2b net cash.

How Healthy Is Brother Industries' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Brother Industries had liabilities of JP¥183.3b due within 12 months and liabilities of JP¥57.8b due beyond that. Offsetting this, it had JP¥172.8b in cash and JP¥154.3b in receivables that were due within 12 months. So it can boast JP¥85.9b more liquid assets than total liabilities.

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

View our latest analysis for Brother Industries

While Brother Industries doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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 Brother Industries can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Brother Industries 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. During the last three years, Brother Industries produced sturdy free cash flow equating to 51% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Brother Industries has net cash of JP¥172.2b, as well as more liquid assets than liabilities. So we don't think Brother Industries's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Brother Industries that you should be aware of before investing here.

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.