Micronics Japan (TSE:6871) Seems To Use Debt Quite Sensibly
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 Micronics Japan Co., Ltd. (TSE:6871) makes use of debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 Micronics Japan Carry?
The image below, which you can click on for greater detail, shows that at September 2025 Micronics Japan had debt of JP¥6.60b, up from JP¥1.17b in one year. But it also has JP¥15.6b in cash to offset that, meaning it has JP¥8.98b net cash.
How Strong Is Micronics Japan's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Micronics Japan had liabilities of JP¥20.2b due within 12 months and liabilities of JP¥9.27b due beyond that. On the other hand, it had cash of JP¥15.6b and JP¥11.4b worth of receivables due within a year. So its liabilities total JP¥2.49b more than the combination of its cash and short-term receivables.
This state of affairs indicates that Micronics Japan's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the JP¥226.4b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Micronics Japan also has more cash than debt, so we're pretty confident it can manage its debt safely.
Check out our latest analysis for Micronics Japan
On top of that, Micronics Japan grew its EBIT by 35% over the last twelve months, and that growth will make it easier to handle its debt. 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 Micronics Japan 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. Micronics Japan 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. Considering the last three years, Micronics Japan actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.
Summing Up
We could understand if investors are concerned about Micronics Japan's liabilities, but we can be reassured by the fact it has has net cash of JP¥8.98b. And it impressed us with its EBIT growth of 35% over the last year. So we don't have any problem with Micronics Japan's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Micronics Japan , and understanding them should be part of your investment process.
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.
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.