Seiko Epson (TSE:6724) Has A Rock Solid Balance Sheet

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. We can see that Seiko Epson Corporation (TSE:6724) does use debt in its business. But should shareholders be worried about its use of debt?

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What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.

What Is Seiko Epson's Net Debt?

As you can see below, at the end of September 2025, Seiko Epson had JP¥208.9b of debt, up from JP¥190.9b a year ago. Click the image for more detail. But on the other hand it also has JP¥217.9b in cash, leading to a JP¥8.98b net cash position.

How Strong Is Seiko Epson's Balance Sheet?

According to the last reported balance sheet, Seiko Epson had liabilities of JP¥409.8b due within 12 months, and liabilities of JP¥218.3b due beyond 12 months. Offsetting this, it had JP¥217.9b in cash and JP¥232.4b in receivables that were due within 12 months. So it has liabilities totalling JP¥177.8b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Seiko Epson is worth JP¥644.1b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Seiko Epson boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Seiko Epson

And we also note warmly that Seiko Epson grew its EBIT by 20% 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 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. Seiko Epson 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 last three years, Seiko Epson recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While Seiko Epson does have more liabilities than liquid assets, it also has net cash of JP¥8.98b. And it impressed us with free cash flow of JP¥26b, being 82% of its EBIT. So we don't think Seiko Epson's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Seiko Epson 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.