Tigers Polymer (TSE:4231) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Tigers Polymer Corporation (TSE:4231) makes use of debt. But should shareholders be worried about its use of debt?

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.

Check out our latest analysis for Tigers Polymer

What Is Tigers Polymer's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Tigers Polymer had JP¥3.00b of debt in March 2024, down from JP¥3.20b, one year before. However, it does have JP¥18.2b in cash offsetting this, leading to net cash of JP¥15.2b.

How Healthy Is Tigers Polymer's Balance Sheet?

We can see from the most recent balance sheet that Tigers Polymer had liabilities of JP¥10.6b falling due within a year, and liabilities of JP¥4.39b due beyond that. On the other hand, it had cash of JP¥18.2b and JP¥9.64b worth of receivables due within a year. So it can boast JP¥12.8b more liquid assets than total liabilities.

This surplus strongly suggests that Tigers Polymer has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Tigers Polymer has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Tigers Polymer grew its EBIT by 193% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Tigers Polymer 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. While Tigers Polymer 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, Tigers Polymer actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Tigers Polymer has JP¥15.2b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 121% of that EBIT to free cash flow, bringing in JP¥5.1b. The bottom line is that Tigers Polymer's use of debt is absolutely fine. 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. For example - Tigers Polymer has 2 warning signs we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.