Seiko (TSE:6286) Seems To Use Debt Rather Sparingly
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. We note that Seiko Corporation (TSE:6286) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Seiko's Debt?
The image below, which you can click on for greater detail, shows that Seiko had debt of JP¥2.63b at the end of September 2025, a reduction from JP¥4.18b over a year. But on the other hand it also has JP¥6.79b in cash, leading to a JP¥4.17b net cash position.
A Look At Seiko's Liabilities
According to the last reported balance sheet, Seiko had liabilities of JP¥10.6b due within 12 months, and liabilities of JP¥1.36b due beyond 12 months. Offsetting this, it had JP¥6.79b in cash and JP¥4.71b in receivables that were due within 12 months. So it has liabilities totalling JP¥413.0m more than its cash and near-term receivables, combined.
Since publicly traded Seiko shares are worth a total of JP¥9.66b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Seiko also has more cash than debt, so we're pretty confident it can manage its debt safely.
See our latest analysis for Seiko
And we also note warmly that Seiko grew its EBIT by 17% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Seiko will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Seiko 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. During the last three years, Seiko produced sturdy free cash flow equating to 75% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
Summing Up
We could understand if investors are concerned about Seiko's liabilities, but we can be reassured by the fact it has has net cash of JP¥4.17b. And it impressed us with free cash flow of JP¥1.2b, being 75% of its EBIT. So is Seiko's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Seiko is showing 1 warning sign in our investment analysis , you should know about...
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.