Does Nippon Shokubai (TSE:4114) Have A Healthy Balance Sheet?

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.' 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. Importantly, Nippon Shokubai Co., Ltd. (TSE:4114) does carry debt. But the real question is whether this debt is making the company risky.

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What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Nippon Shokubai's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2025 Nippon Shokubai had debt of JP¥43.7b, up from JP¥33.0b in one year. But it also has JP¥45.9b in cash to offset that, meaning it has JP¥2.18b net cash.

How Strong Is Nippon Shokubai's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nippon Shokubai had liabilities of JP¥92.4b due within 12 months and liabilities of JP¥53.6b due beyond that. Offsetting these obligations, it had cash of JP¥45.9b as well as receivables valued at JP¥92.4b due within 12 months. So it has liabilities totalling JP¥7.74b more than its cash and near-term receivables, combined.

Since publicly traded Nippon Shokubai shares are worth a total of JP¥291.6b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Nippon Shokubai boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Nippon Shokubai

On the other hand, Nippon Shokubai saw its EBIT drop by 9.3% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 Nippon Shokubai 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Nippon Shokubai 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. Happily for any shareholders, Nippon Shokubai actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about Nippon Shokubai's liabilities, but we can be reassured by the fact it has has net cash of JP¥2.18b. The cherry on top was that in converted 137% of that EBIT to free cash flow, bringing in JP¥5.7b. So is Nippon Shokubai's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Nippon Shokubai that 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.