Some say that volatility, not debt, is the best way to think about risk as an investor, but Warren Buffett once said, “Volatility is far from synonymous with risk.” It’s only natural to consider a company’s balance sheet when examining how risky it is, since debt is often involved when a company collapses. As with many other companies DENSO Corporation (TSE:6902) is using debt. But is this debt a problem for shareholders?
When is debt dangerous?
Debt is one tool that helps businesses grow, but if a company is unable to repay its lenders, it is at their mercy. If things go really bad, lenders can take control of the company. A more common (but still costly) situation, however, is that a company must dilute shareholders at a cheap share price just to get its debt under control. The benefit of debt, of course, is that it often represents cheap capital, especially when it replaces a company’s dilution with the ability to reinvest at a high rate of return. When considering how much debt a company has, you should first look at its cash and debt together.
Check out our latest analysis for DENSO
How much debt does DENSO have?
The image below, which you can click on for more details, shows that DENSO had debt of JP¥771.2 billion at the end of June 2024, a reduction of JP¥929.5 billion over one year. On the other hand, the company also has JP¥1.07 trillion in cash, resulting in a net cash balance of JP¥301.3 billion.
A look at DENSO’s liabilities
According to the most recent balance sheet data, DENSO had liabilities of JP¥2.14 trillion due within one year and liabilities of JP¥1.06 trillion due thereafter. These liabilities were offset by cash of JP¥1.07 trillion and receivables of JP¥1.18 trillion due within 12 months. Thus, liabilities exceed the sum of cash and (short-term) receivables by JP¥952.6 billion.
Given DENSO’s massive market capitalization of JPY6.64 trillion, it’s hard to believe that these liabilities pose much of a threat. However, there are enough liabilities that we would certainly recommend shareholders keep an eye on the balance sheet going forward. While there are liabilities worth noting, DENSO also has more cash than debt, so we’re fairly confident that the company can manage its debt safely.
On the other hand, DENSO’s EBIT has fallen by 11% over the last year. We believe that such a development, if repeated frequently, could well spell trouble for the stock. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will determine whether DENSO can strengthen its balance sheet over time. So if you want to know what the professionals think, you might find this free report on analyst earnings forecasts interesting.
Finally, while the taxman loves accounting profits, lenders only accept cold hard cash. Although DENSO 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 understand how quickly the company builds (or burns through) that cash pile. Over the last three years, DENSO recorded free cash flow equal to 67% of its EBIT, which is about normal given that free cash flow excludes interest and tax. This cold hard cash means the company can reduce its debt if it wants to.
Summary
While DENSO’s balance sheet is not particularly strong due to its total liabilities, it is positive that the company has net cash flow of JP¥301.3 billion. And it impressed us with free cash flow of JP¥486 billion, which is 67% of its EBIT. So we have no problem with DENSO’s use of debt. Over time, share prices tend to follow earnings per share, so if you’re interested in DENSO, click here to see an interactive graph of its earnings per share history.
Of course, if you’re one of those investors who prefers to buy stocks without the burden of debt, you should discover our exclusive list of net cash growth stocks today.
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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.
