Shimadzu (TSE:7701) Seems To Use Debt Quite Sensibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Shimadzu Corporation (TSE:7701) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Shimadzu

What Is Shimadzu's Debt?

As you can see below, Shimadzu had JP¥1.54b of debt at September 2024, down from JP¥1.73b a year prior. However, its balance sheet shows it holds JP¥157.1b in cash, so it actually has JP¥155.6b net cash.

How Strong Is Shimadzu's Balance Sheet?

We can see from the most recent balance sheet that Shimadzu had liabilities of JP¥137.3b falling due within a year, and liabilities of JP¥22.5b due beyond that. Offsetting these obligations, it had cash of JP¥157.1b as well as receivables valued at JP¥124.0b due within 12 months. So it actually has JP¥121.3b more liquid assets than total liabilities.

This surplus suggests that Shimadzu has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Shimadzu boasts net cash, so it's fair to say it does not have a heavy debt load!

Shimadzu's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shimadzu 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Looking at the most recent three years, Shimadzu recorded free cash flow of 45% 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 Shimadzu has JP¥155.6b in net cash and a decent-looking balance sheet. So we don't have any problem with Shimadzu's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Shimadzu, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.