Toyo Tire (TSE:5105) Has A Pretty Healthy Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Toyo Tire Corporation (TSE:5105) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Toyo Tire's Net Debt?

The image below, which you can click on for greater detail, shows that Toyo Tire had debt of JP¥76.7b at the end of June 2025, a reduction from JP¥96.5b over a year. However, its balance sheet shows it holds JP¥93.4b in cash, so it actually has JP¥16.6b net cash.

How Healthy Is Toyo Tire's Balance Sheet?

According to the last reported balance sheet, Toyo Tire had liabilities of JP¥139.8b due within 12 months, and liabilities of JP¥89.4b due beyond 12 months. On the other hand, it had cash of JP¥93.4b and JP¥120.8b worth of receivables due within a year. So it has liabilities totalling JP¥15.1b more than its cash and near-term receivables, combined.

Since publicly traded Toyo Tire shares are worth a total of JP¥591.7b, 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, Toyo Tire boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Toyo Tire

But the other side of the story is that Toyo Tire saw its EBIT decline by 3.3% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Toyo Tire's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Toyo Tire 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. Looking at the most recent three years, Toyo Tire recorded free cash flow of 50% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Toyo Tire's liabilities, but we can be reassured by the fact it has has net cash of JP¥16.6b. So we are not troubled with Toyo Tire's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Toyo Tire , and understanding them should be part of your investment process.

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.