Does New Cosmos ElectricLtd (TSE:6824) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 New Cosmos Electric Co.,Ltd. (TSE:6824) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

View our latest analysis for New Cosmos ElectricLtd

What Is New Cosmos ElectricLtd's Debt?

As you can see below, at the end of March 2024, New Cosmos ElectricLtd had JP¥5.83b of debt, up from JP¥842.0m a year ago. Click the image for more detail. However, it does have JP¥20.8b in cash offsetting this, leading to net cash of JP¥15.0b.

A Look At New Cosmos ElectricLtd's Liabilities

According to the last reported balance sheet, New Cosmos ElectricLtd had liabilities of JP¥11.8b due within 12 months, and liabilities of JP¥7.38b due beyond 12 months. Offsetting these obligations, it had cash of JP¥20.8b as well as receivables valued at JP¥9.97b due within 12 months. So it actually has JP¥11.6b more liquid assets than total liabilities.

This surplus strongly suggests that New Cosmos ElectricLtd has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, New Cosmos ElectricLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that New Cosmos ElectricLtd's load is not too heavy, because its EBIT was down 28% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since New Cosmos ElectricLtd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. New Cosmos ElectricLtd 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. Looking at the most recent three years, New Cosmos ElectricLtd recorded free cash flow of 26% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case New Cosmos ElectricLtd has JP¥15.0b in net cash and a decent-looking balance sheet. So we are not troubled with New Cosmos ElectricLtd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for New Cosmos ElectricLtd you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com