Osaki Electric (TSE:6644) Has A Pretty Healthy Balance Sheet

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.' 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. We note that Osaki Electric Co., Ltd. (TSE:6644) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Osaki Electric

What Is Osaki Electric's Net Debt?

As you can see below, at the end of September 2024, Osaki Electric had JP¥8.98b of debt, up from JP¥5.28b a year ago. Click the image for more detail. However, its balance sheet shows it holds JP¥15.8b in cash, so it actually has JP¥6.81b net cash.

A Look At Osaki Electric's Liabilities

We can see from the most recent balance sheet that Osaki Electric had liabilities of JP¥29.7b falling due within a year, and liabilities of JP¥7.89b due beyond that. Offsetting this, it had JP¥15.8b in cash and JP¥16.4b in receivables that were due within 12 months. So it has liabilities totalling JP¥5.40b more than its cash and near-term receivables, combined.

Of course, Osaki Electric has a market capitalization of JP¥39.6b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Osaki Electric boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Osaki Electric grew its EBIT by 31% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Osaki Electric 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Osaki Electric 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. In the last three years, Osaki Electric's free cash flow amounted to 25% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

Although Osaki Electric'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¥6.81b. And it impressed us with its EBIT growth of 31% over the last year. So is Osaki Electric'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 Osaki Electric's earnings per share history for free.

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.