We Think Tanaka Seimitsu Kogyo (TYO:7218) Has A Fair Chunk Of Debt

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. We can see that Tanaka Seimitsu Kogyo Co., Ltd. (TYO:7218) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Tanaka Seimitsu Kogyo

How Much Debt Does Tanaka Seimitsu Kogyo Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Tanaka Seimitsu Kogyo had JP¥11.4b of debt, an increase on JP¥9.26b, over one year. On the flip side, it has JP¥8.58b in cash leading to net debt of about JP¥2.81b.

A Look At Tanaka Seimitsu Kogyo's Liabilities

According to the last reported balance sheet, Tanaka Seimitsu Kogyo had liabilities of JP¥12.2b due within 12 months, and liabilities of JP¥4.66b due beyond 12 months. On the other hand, it had cash of JP¥8.58b and JP¥2.82b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥5.47b.

This deficit is considerable relative to its market capitalization of JP¥6.80b, so it does suggest shareholders should keep an eye on Tanaka Seimitsu Kogyo's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is Tanaka Seimitsu Kogyo's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Tanaka Seimitsu Kogyo made a loss at the EBIT level, and saw its revenue drop to JP¥26b, which is a fall of 25%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Tanaka Seimitsu Kogyo's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping JP¥839m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through JP¥2.3b of cash over the last year. So suffice it to say we consider the stock very risky. 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. To that end, you should learn about the 2 warning signs we've spotted with Tanaka Seimitsu Kogyo (including 1 which is potentially serious) .

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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