Is Takahashi Curtain Wall (TYO:1994) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Takahashi Curtain Wall Corporation (TYO:1994) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Takahashi Curtain Wall

How Much Debt Does Takahashi Curtain Wall Carry?

As you can see below, at the end of September 2020, Takahashi Curtain Wall had JP¥989.0m of debt, up from JP¥925.0m a year ago. Click the image for more detail. However, it does have JP¥1.91b in cash offsetting this, leading to net cash of JP¥918.0m.

How Strong Is Takahashi Curtain Wall's Balance Sheet?

According to the last reported balance sheet, Takahashi Curtain Wall had liabilities of JP¥2.19b due within 12 months, and liabilities of JP¥719.0m due beyond 12 months. Offsetting these obligations, it had cash of JP¥1.91b as well as receivables valued at JP¥1.60b due within 12 months. So it actually has JP¥607.0m more liquid assets than total liabilities.

This surplus suggests that Takahashi Curtain Wall has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Takahashi Curtain Wall boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Takahashi Curtain Wall's load is not too heavy, because its EBIT was down 51% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is Takahashi Curtain Wall'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Takahashi Curtain Wall 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, Takahashi Curtain Wall recorded free cash flow worth 69% 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 investigate a company's debt, in this case Takahashi Curtain Wall has JP¥918.0m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥1.9b, being 69% of its EBIT. So we don't have any problem with Takahashi Curtain Wall's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 5 warning signs for Takahashi Curtain Wall (1 is a bit concerning!) 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. 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.
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