These 4 Measures Indicate That Yokogawa Electric (TSE:6841) Is Using Debt Safely

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.' 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. We note that Yokogawa Electric Corporation (TSE:6841) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Yokogawa Electric Carry?

As you can see below, Yokogawa Electric had JP¥24.1b of debt, at September 2025, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds JP¥186.2b in cash, so it actually has JP¥162.1b net cash.

How Healthy Is Yokogawa Electric's Balance Sheet?

We can see from the most recent balance sheet that Yokogawa Electric had liabilities of JP¥206.2b falling due within a year, and liabilities of JP¥25.0b due beyond that. Offsetting these obligations, it had cash of JP¥186.2b as well as receivables valued at JP¥232.6b due within 12 months. So it can boast JP¥187.5b more liquid assets than total liabilities.

This surplus suggests that Yokogawa Electric has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Yokogawa Electric has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for Yokogawa Electric

The good news is that Yokogawa Electric has increased its EBIT by 5.9% 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 ultimately the future profitability of the business will decide if Yokogawa Electric 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 company can only pay off debt with cold hard cash, not accounting profits. While Yokogawa Electric 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, Yokogawa Electric produced sturdy free cash flow equating to 65% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Yokogawa Electric has JP¥162.1b in net cash and a decent-looking balance sheet. So we don't think Yokogawa Electric'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 Yokogawa Electric's earnings per share history for free.

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.