Is Seiko Epson (TSE:6724) Using Too Much Debt?

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. As with many other companies Seiko Epson Corporation (TSE:6724) makes use of debt. But the more important question is: how much risk is that debt creating?

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What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Seiko Epson's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Seiko Epson had JP¥227.4b of debt, an increase on JP¥205.9b, over one year. But on the other hand it also has JP¥265.8b in cash, leading to a JP¥38.4b net cash position.

How Strong Is Seiko Epson's Balance Sheet?

We can see from the most recent balance sheet that Seiko Epson had liabilities of JP¥457.0b falling due within a year, and liabilities of JP¥209.6b due beyond that. Offsetting this, it had JP¥265.8b in cash and JP¥235.2b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥165.6b.

While this might seem like a lot, it is not so bad since Seiko Epson has a market capitalization of JP¥664.3b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Seiko Epson also has more cash than debt, so we're pretty confident it can manage its debt safely.

See our latest analysis for Seiko Epson

Also good is that Seiko Epson grew its EBIT at 15% over the last year, further increasing its ability to manage debt. 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 Seiko Epson can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts .

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Seiko Epson 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, Seiko Epson produced sturdy free cash flow equating to 77% 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

Although Seiko Epson'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¥38.4b. And it impressed us with free cash flow of JP¥92b, being 77% of its EBIT. So is Seiko Epson's debt a risk? It doesn't seem so to us. Given Seiko Epson has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link .

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.

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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.