These 4 Measures Indicate That Nippon Concept (TSE:9386) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Nippon Concept Corporation (TSE:9386) makes use of debt. But should shareholders be worried about its use of debt?

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When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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 step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Nippon Concept Carry?

You can click the graphic below for the historical numbers, but it shows that Nippon Concept had JP¥1.68b of debt in December 2024, down from JP¥2.11b, one year before. But it also has JP¥10.7b in cash to offset that, meaning it has JP¥9.07b net cash.

How Healthy Is Nippon Concept's Balance Sheet?

We can see from the most recent balance sheet that Nippon Concept had liabilities of JP¥3.77b falling due within a year, and liabilities of JP¥4.31b due beyond that. Offsetting this, it had JP¥10.7b in cash and JP¥2.63b in receivables that were due within 12 months. So it actually has JP¥5.30b more liquid assets than total liabilities.

This surplus suggests that Nippon Concept 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. Succinctly put, Nippon Concept boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Nippon Concept

On the other hand, Nippon Concept's EBIT dived 14%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Nippon Concept'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Nippon Concept 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. During the last three years, Nippon Concept generated free cash flow amounting to a very robust 85% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Nippon Concept has net cash of JP¥9.07b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥1.9b, being 85% of its EBIT. So we don't think Nippon Concept's use of debt is risky. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Nippon Concept's dividend history , without delay!

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.