Here's Why DAIKO XTECH (TSE:8023) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, DAIKO XTECH, Ltd. (TSE:8023) does carry debt. But the real question is whether this debt is making the company risky.

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What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does DAIKO XTECH Carry?

As you can see below, DAIKO XTECH had JP¥2.07b of debt, at June 2025, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has JP¥11.5b in cash, leading to a JP¥9.45b net cash position.

How Healthy Is DAIKO XTECH's Balance Sheet?

We can see from the most recent balance sheet that DAIKO XTECH had liabilities of JP¥9.61b falling due within a year, and liabilities of JP¥4.40b due beyond that. Offsetting this, it had JP¥11.5b in cash and JP¥6.54b in receivables that were due within 12 months. So it can boast JP¥4.05b more liquid assets than total liabilities.

This surplus suggests that DAIKO XTECH is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that DAIKO XTECH has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for DAIKO XTECH

In fact DAIKO XTECH's saving grace is its low debt levels, because its EBIT has tanked 35% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is DAIKO XTECH's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While DAIKO XTECH 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, DAIKO XTECH recorded free cash flow worth 75% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that DAIKO XTECH has net cash of JP¥9.45b, as well as more liquid assets than liabilities. The cherry on top was that in converted 75% of that EBIT to free cash flow, bringing in JP¥1.2b. So is DAIKO XTECH's debt a risk? It doesn't seem so to us. Given DAIKO XTECH has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.