We Think Tanaka Seimitsu Kogyo (TSE:7218) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Tanaka Seimitsu Kogyo Co., Ltd. (TSE:7218) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Tanaka Seimitsu Kogyo

What Is Tanaka Seimitsu Kogyo's Net Debt?

The image below, which you can click on for greater detail, shows that Tanaka Seimitsu Kogyo had debt of JP¥4.18b at the end of December 2023, a reduction from JP¥6.94b over a year. But it also has JP¥9.67b in cash to offset that, meaning it has JP¥5.49b net cash.

How Strong Is Tanaka Seimitsu Kogyo's Balance Sheet?

The latest balance sheet data shows that Tanaka Seimitsu Kogyo had liabilities of JP¥10.6b due within a year, and liabilities of JP¥2.35b falling due after that. Offsetting these obligations, it had cash of JP¥9.67b as well as receivables valued at JP¥4.40b due within 12 months. So it can boast JP¥1.09b more liquid assets than total liabilities.

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

Better yet, Tanaka Seimitsu Kogyo grew its EBIT by 167% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Tanaka Seimitsu Kogyo 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. Happily for any shareholders, Tanaka Seimitsu Kogyo actually produced more free cash flow than EBIT over the last three years. 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 it is always sensible to investigate a company's debt, in this case Tanaka Seimitsu Kogyo has JP¥5.49b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 155% of that EBIT to free cash flow, bringing in JP¥5.7b. So is Tanaka Seimitsu Kogyo'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 example, we've discovered 2 warning signs for Tanaka Seimitsu Kogyo that you should be aware of before investing here.

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.