We Think Japan Aviation Electronics Industry (TSE:6807) Can Manage Its Debt With Ease

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 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 Japan Aviation Electronics Industry, Limited (TSE:6807) 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Japan Aviation Electronics Industry

What Is Japan Aviation Electronics Industry's Debt?

As you can see below, at the end of September 2024, Japan Aviation Electronics Industry had JP¥45.3b of debt, up from JP¥5.89b a year ago. Click the image for more detail. However, it does have JP¥55.9b in cash offsetting this, leading to net cash of JP¥10.6b.

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

The latest balance sheet data shows that Japan Aviation Electronics Industry had liabilities of JP¥50.9b due within a year, and liabilities of JP¥39.8b falling due after that. Offsetting these obligations, it had cash of JP¥55.9b as well as receivables valued at JP¥40.6b due within 12 months. So it actually has JP¥5.83b 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.

Another good sign is that Japan Aviation Electronics Industry has been able to increase its EBIT by 25% in twelve months, making it easier to pay down debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Japan Aviation Electronics Industry 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. Over the most recent three years, Japan Aviation Electronics Industry recorded free cash flow worth 73% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Japan Aviation Electronics Industry has net cash of JP¥10.6b, as well as more liquid assets than liabilities. And we liked the look of last year's 25% year-on-year EBIT growth. So is Japan Aviation Electronics Industry's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Japan Aviation Electronics Industry, you may well want to click here to check an interactive graph of its earnings per share history.

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.