We Think MK Seiko (TSE:5906) Can Stay On Top Of Its Debt

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies MK Seiko Co., Ltd. (TSE:5906) makes use of debt. But the real question is whether this debt is making the company risky.

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When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is MK Seiko's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2025 MK Seiko had JP¥4.22b of debt, an increase on JP¥3.83b, over one year. However, it does have JP¥5.32b in cash offsetting this, leading to net cash of JP¥1.10b.

A Look At MK Seiko's Liabilities

The latest balance sheet data shows that MK Seiko had liabilities of JP¥9.37b due within a year, and liabilities of JP¥2.40b falling due after that. On the other hand, it had cash of JP¥5.32b and JP¥6.93b worth of receivables due within a year. So it actually has JP¥482.0m more liquid assets than total liabilities.

This surplus suggests that MK Seiko has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, MK Seiko boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for MK Seiko

It is just as well that MK Seiko's load is not too heavy, because its EBIT was down 36% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since MK Seiko will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While MK Seiko 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, MK Seiko produced sturdy free cash flow equating to 78% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case MK Seiko has JP¥1.10b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥500m, being 78% of its EBIT. So we don't have any problem with MK Seiko's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for MK Seiko you should know about.

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.