These 4 Measures Indicate That Nippon Hume (TSE:5262) Is Using Debt Extensively

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Nippon Hume Corporation (TSE:5262) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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What Risk Does Debt Bring?

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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is Nippon Hume's Debt?

The image below, which you can click on for greater detail, shows that Nippon Hume had debt of JP¥838.0m at the end of September 2025, a reduction from JP¥928.0m over a year. However, it does have JP¥10.2b in cash offsetting this, leading to net cash of JP¥9.37b.

How Strong Is Nippon Hume's Balance Sheet?

According to the last reported balance sheet, Nippon Hume had liabilities of JP¥7.48b due within 12 months, and liabilities of JP¥4.96b due beyond 12 months. On the other hand, it had cash of JP¥10.2b and JP¥9.40b worth of receivables due within a year. So it can boast JP¥7.16b more liquid assets than total liabilities.

This short term liquidity is a sign that Nippon Hume could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Nippon Hume boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Nippon Hume

In fact Nippon Hume's saving grace is its low debt levels, because its EBIT has tanked 36% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Nippon Hume'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Nippon Hume 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 last three years, Nippon Hume saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Nippon Hume has net cash of JP¥9.37b, as well as more liquid assets than liabilities. So while Nippon Hume does not have a great balance sheet, it's certainly not too bad. 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. For instance, we've identified 2 warning signs for Nippon Hume (1 is significant) you should be aware of.

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.