Terasaki ElectricLtd (TYO:6637) Seems To Use Debt Rather Sparingly

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 Terasaki Electric Co.,Ltd. (TYO:6637) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Terasaki ElectricLtd

How Much Debt Does Terasaki ElectricLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Terasaki ElectricLtd had JP¥2.21b of debt in December 2020, down from JP¥2.94b, one year before. But on the other hand it also has JP¥12.0b in cash, leading to a JP¥9.78b net cash position.

How Strong Is Terasaki ElectricLtd's Balance Sheet?

We can see from the most recent balance sheet that Terasaki ElectricLtd had liabilities of JP¥10.6b falling due within a year, and liabilities of JP¥3.12b due beyond that. Offsetting these obligations, it had cash of JP¥12.0b as well as receivables valued at JP¥10.6b due within 12 months. So it actually has JP¥8.97b more liquid assets than total liabilities.

This excess liquidity is a great indication that Terasaki ElectricLtd's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Terasaki ElectricLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Terasaki ElectricLtd grew its EBIT at 17% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Terasaki ElectricLtd 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, a company can only pay off debt with cold hard cash, not accounting profits. While Terasaki ElectricLtd 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, Terasaki ElectricLtd recorded free cash flow worth 66% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Terasaki ElectricLtd has JP¥9.78b in net cash and a decent-looking balance sheet. The bottom line is that we do not find Terasaki ElectricLtd's debt levels at all concerning. 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. For instance, we've identified 1 warning sign for Terasaki ElectricLtd that 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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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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