We Think Shimadzu (TSE:7701) Can Stay On Top Of Its Debt

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.' 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. Importantly, Shimadzu Corporation (TSE:7701) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

Check out our latest analysis for Shimadzu

What Is Shimadzu's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Shimadzu had debt of JP¥1.59b, up from JP¥1.51b in one year. However, its balance sheet shows it holds JP¥150.4b in cash, so it actually has JP¥148.8b net cash.

How Healthy Is Shimadzu's Balance Sheet?

We can see from the most recent balance sheet that Shimadzu had liabilities of JP¥141.4b falling due within a year, and liabilities of JP¥23.5b due beyond that. On the other hand, it had cash of JP¥150.4b and JP¥128.8b worth of receivables due within a year. So it can boast JP¥114.2b 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. Simply put, the fact that Shimadzu has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Shimadzu saw its EBIT drop by 2.2% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Shimadzu can strengthen its balance sheet over time. 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. Shimadzu 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, Shimadzu recorded free cash flow of 43% 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¥148.8b 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.

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.

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

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.