Is Toyoda Gosei (TSE:7282) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Toyoda Gosei Co., Ltd. (TSE:7282) does use debt in its business. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Toyoda Gosei's Net Debt?

As you can see below, Toyoda Gosei had JP¥109.5b of debt at March 2025, down from JP¥138.4b a year prior. However, its balance sheet shows it holds JP¥141.3b in cash, so it actually has JP¥31.8b net cash.

How Healthy Is Toyoda Gosei's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Toyoda Gosei had liabilities of JP¥185.7b due within 12 months and liabilities of JP¥138.9b due beyond that. Offsetting this, it had JP¥141.3b in cash and JP¥176.4b in receivables that were due within 12 months. So its liabilities total JP¥6.92b more than the combination of its cash and short-term receivables.

Given Toyoda Gosei has a market capitalization of JP¥334.4b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Toyoda Gosei boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Toyoda Gosei

On the other hand, Toyoda Gosei's EBIT dived 15%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Toyoda Gosei can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Toyoda Gosei 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 most recent three years, Toyoda Gosei recorded free cash flow worth 73% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Toyoda Gosei has JP¥31.8b in net cash. The cherry on top was that in converted 73% of that EBIT to free cash flow, bringing in JP¥34b. So we don't have any problem with Toyoda Gosei's use of debt. 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. Be aware that Toyoda Gosei is showing 1 warning sign in our investment analysis , you should know about...

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.

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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.