Does Shimadzu (TSE:7701) Have A Healthy Balance Sheet?

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.' 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 Shimadzu Corporation (TSE:7701) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Shimadzu

What Is Shimadzu's Net Debt?

As you can see below, at the end of December 2023, Shimadzu had JP¥1.63b of debt, up from JP¥1.55b a year ago. Click the image for more detail. But on the other hand it also has JP¥143.9b in cash, leading to a JP¥142.2b net cash position.

A Look At Shimadzu's Liabilities

Zooming in on the latest balance sheet data, we can see that Shimadzu had liabilities of JP¥143.6b due within 12 months and liabilities of JP¥24.1b due beyond that. Offsetting these obligations, it had cash of JP¥143.9b as well as receivables valued at JP¥121.1b due within 12 months. So it actually has JP¥97.3b more liquid assets than total liabilities.

This short term liquidity is a sign that Shimadzu could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shimadzu boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Shimadzu grew its EBIT at 14% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Shimadzu'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 company can only pay off debt with cold hard cash, not accounting profits. While Shimadzu 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, Shimadzu recorded free cash flow worth 55% 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 it is always sensible to investigate a company's debt, in this case Shimadzu has JP¥142.2b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 14% over the last year. So is Shimadzu's debt a risk? It doesn't seem so to us. 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 Shimadzu'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.