Nihon Tokushu Toryo (TSE:4619) Has A Rock Solid Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Nihon Tokushu Toryo Co., Ltd. (TSE:4619) does carry debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

Check out our latest analysis for Nihon Tokushu Toryo

What Is Nihon Tokushu Toryo's Net Debt?

The image below, which you can click on for greater detail, shows that Nihon Tokushu Toryo had debt of JP¥3.95b at the end of March 2024, a reduction from JP¥7.36b over a year. However, its balance sheet shows it holds JP¥15.9b in cash, so it actually has JP¥11.9b net cash.

How Healthy Is Nihon Tokushu Toryo's Balance Sheet?

We can see from the most recent balance sheet that Nihon Tokushu Toryo had liabilities of JP¥21.4b falling due within a year, and liabilities of JP¥6.49b due beyond that. Offsetting this, it had JP¥15.9b in cash and JP¥15.5b in receivables that were due within 12 months. So it can boast JP¥3.51b more liquid assets than total liabilities.

This surplus suggests that Nihon Tokushu Toryo has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Nihon Tokushu Toryo has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Nihon Tokushu Toryo grew its EBIT by 139% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Nihon Tokushu Toryo 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. Nihon Tokushu Toryo 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. Over the last three years, Nihon Tokushu Toryo actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Nihon Tokushu Toryo has net cash of JP¥11.9b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥6.2b, being 184% of its EBIT. So is Nihon Tokushu Toryo's debt a risk? It doesn't seem so to us. Given Nihon Tokushu Toryo has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.