Takeda Machinery (TYO:6150) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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, Takeda Machinery Co., Ltd. (TYO:6150) does carry debt. But the real question is whether this debt is making the company risky.

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Takeda Machinery

How Much Debt Does Takeda Machinery Carry?

As you can see below, Takeda Machinery had JP¥1.01b of debt, at November 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has JP¥1.09b in cash to offset that, meaning it has JP¥79.0m net cash.

How Healthy Is Takeda Machinery's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Takeda Machinery had liabilities of JP¥1.52b due within 12 months and liabilities of JP¥665.0m due beyond that. On the other hand, it had cash of JP¥1.09b and JP¥701.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥388.0m.

Of course, Takeda Machinery has a market capitalization of JP¥2.33b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Takeda Machinery also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that Takeda Machinery's load is not too heavy, because its EBIT was down 71% 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 you can't view debt in total isolation; since Takeda Machinery will need earnings to service that debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Takeda Machinery 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 most recent three years, Takeda Machinery recorded free cash flow worth 66% 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

Although Takeda Machinery's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of JP¥79.0m. So we don't have any problem with Takeda Machinery'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. For instance, we've identified 3 warning signs for Takeda Machinery (1 is potentially serious) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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