These 4 Measures Indicate That NF Holdings (TSE:6864) Is Using Debt Reasonably Well

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 can see that NF Holdings Corporation (TSE:6864) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for NF Holdings

How Much Debt Does NF Holdings Carry?

The image below, which you can click on for greater detail, shows that NF Holdings had debt of JP¥1.61b at the end of September 2024, a reduction from JP¥1.72b over a year. However, it does have JP¥5.31b in cash offsetting this, leading to net cash of JP¥3.70b.

How Healthy Is NF Holdings' Balance Sheet?

According to the last reported balance sheet, NF Holdings had liabilities of JP¥2.99b due within 12 months, and liabilities of JP¥807.0m due beyond 12 months. Offsetting this, it had JP¥5.31b in cash and JP¥2.89b in receivables that were due within 12 months. So it can boast JP¥4.40b more liquid assets than total liabilities.

This excess liquidity is a great indication that NF Holdings' balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, NF Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact NF Holdings's saving grace is its low debt levels, because its EBIT has tanked 79% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is NF Holdings's earnings that will influence how the balance sheet holds up in the future. 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. NF Holdings 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, NF Holdings burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that NF Holdings has net cash of JP¥3.70b, as well as more liquid assets than liabilities. So we don't have any problem with NF Holdings's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 6 warning signs for NF Holdings (of which 2 are a bit unpleasant!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.