Japan Aviation Electronics Industry (TSE:6807) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Japan Aviation Electronics Industry, Limited (TSE:6807) makes use of debt. But the more important question is: how much risk is that debt creating?

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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. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Japan Aviation Electronics Industry Carry?

The image below, which you can click on for greater detail, shows that Japan Aviation Electronics Industry had debt of JP¥37.0b at the end of March 2025, a reduction from JP¥64.5b over a year. But it also has JP¥52.9b in cash to offset that, meaning it has JP¥15.9b net cash.

How Strong Is Japan Aviation Electronics Industry's Balance Sheet?

The latest balance sheet data shows that Japan Aviation Electronics Industry had liabilities of JP¥48.9b due within a year, and liabilities of JP¥32.8b falling due after that. Offsetting this, it had JP¥52.9b in cash and JP¥37.6b in receivables that were due within 12 months. So it actually has JP¥8.68b more liquid assets than total liabilities.

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

See our latest analysis for Japan Aviation Electronics Industry

The good news is that Japan Aviation Electronics Industry has increased its EBIT by 8.3% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Japan Aviation Electronics Industry's ability to maintain a healthy balance sheet going forward. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Japan Aviation Electronics Industry 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, Japan Aviation Electronics Industry generated free cash flow amounting to a very robust 90% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Japan Aviation Electronics Industry has JP¥15.9b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 90% of that EBIT to free cash flow, bringing in JP¥18b. So we don't think Japan Aviation Electronics Industry's use of debt is risky. 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 Japan Aviation Electronics Industry'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.